Week Ending May 28

West Texas Intermediate gained 4.31% on the week to finish at $66.32. Its recent grind higher puts it at the top of its multi-month trading range of $57 to $66/Bbl.

Demand recovery optimism has been outweighing worries about increasing oil exports from Iran, who are in talks to rejoin the nuclear deal JCPOA. However, there are still concerns relating to the timing and impact of additional Iranian barrels entering the market. According to London-based E.A. Gibson Shipbrokers, Iran holds as much as 69 MMBbl at sea, oil that could quickly flow to market if the U.S. lifts sanctions.

OPEC+ will hold its next official meeting on June 1. Many analysts expect the group to rubberstamp its previously agreed-upon increase in supply through July. Back in April, the group had agreed to increase output in three phases by about 2 MMBbl/d total.

COVID-19 effects are still lingering in many places, including India, the world's third-largest oil importer. According to Johns Hopkins, although the seven-day Indian average for cases has dropped this month, new infections are still above 200 k/d. In addition, further outbreaks due to slow vaccine roll-outs in India and elsewhere have been offsetting some of the demand recovery in the U.S. and Europe.

AEGIS hedging recommendations remain as such: Swaps are preferred in the balance of 2021 due to near-term risks like Iranian supply and COVID. Cal 2022 is looking more optimistic. We believe the risk skew in the back of 2022 to be to the upside and suggest using collars to allow for more upside participation. At the current price of $60/Bbl for 2022, swaps for this tenor may meet internal goals depending on the company or portfolio. For 2023, we recommend utilizing collars. This tenor is 18 months away, and price has many chances to rise if demand improves and OPEC spare capacity decreases.

Natural gas prices edged higher on the week despite government data showing a higher-than-expected triple-digit build in underground gas storage. The July contract ended Friday at $2.986, up 8c week-over-week, while the balance of Summer '21 finished at 3.02, up 4c week-over-week.

The 115 Bcf injection into storage for the week ending May 21 was just 5 Bcf below the largest injection of 2020. Last week's measured demand was particularly low because of spectacularly boring weather. In fact, last week measured the lowest amount of TDDs (total degree days) for any given week since 2014, according to Bloomberg. The South Central (S.C.) storage region contributed to the larger-than-normal build in gas inventories. S.C. stocks rose by about double the five-year average for this time of year.

We advise caution in paying too much attention to the optically bearish weekly inventory statistic. The trend for the underlying supply and demand fundamentals has been about 0.5-1 Bcf/d tight. It's important to look at how gas balances are trending rather than following individual data points that may contain noise. However, if we continue to see above-average builds in subsequent weeks, we will revisit our bullish point of view. The gas market may be more balanced than we thought, and price skew to the upside could be limited.

AEGIS recommends hedging the balance of the Summer 2021 strip with swaps due to both the absolute price level at $3.00. We recommend using collars in the winter due to the 2:1 call skew that allows double the upside participation on the cap versus the put. Beyond Winter 2021-2022, we believe this portion of the curve is undervalued and suggest applying wide collars if possible. This will allow for more upside participation.