Week Ending June 4

Oil prices rallied to their highest level since late 2018 this week amid slower-than-expected Iranian nuclear deal discussions and OPEC+ standing firm on supply policy. Brent crude settled at $71.89/Bbl on Friday, June 4, up $2.26 from the previous week. WTI finished at its two-and-half-year high of $69.62/Bbl, up $3.30 on the week.

Talks between Iran, the U.S., and European nations are still ongoing and look to possibly be stalling. A deal for Iran to rejoin the 2015 JCPOA nuclear agreement is taken longer than expected. The U.S. State Department suggested that there will be ongoing talks beyond next week’s sixth round of discussions. A potential delay in Iranian barrels reentering the market was bullish this week and helped fuel the rise in price.

OPEC+ reiterated their planned supply increases for July at their June 1 meeting. Tuesday’s announcement from OPEC+ was a confirmation of many analysts’ expectations. Despite the reaffirmation of supply increases through July, oil markets continued to hold strength. According to OPEC, demand growth is forecast to outpace even these additions of supply for the remainder of the year.

AEGIS prefers swaps for most clients in the balance of 2021 and the first half of 2022. We believe collars are better utilized in the 2H2022. West Texas Intermediate and Brent crude could continue higher; however, there are still potential bearish risks that remain in 2021. The return of Iranian barrels is likely needed (in 2022, perhaps) if demand growth estimates materialize, but more supply, too soon, could add downward pressure in the near term. For this reason, we are more cautious about price levels in 2021. Beyond 2021 and especially in the 2H of 2022, we believe the market could be low on available supply compared to demand. We suggest utilizing more upside-friendly structures such as collars in these tenors.

To see details on factors we believe are affecting oil prices and trade recommendations, click the "Read More" button on the Factor Matrix section in the AEGIS Research Module.

Natural gas received a lift this week, climbing 10c to 3.09/MMBtu in the prompt month. The strength was throughout the curve, with the balance of Summer 2021 rising 8c to $3.11/MMBtu and Winter 2021-2022 settling 9c higher at $3.29/MMBtu. Summer 2022 also improved, rising 10c to $2.746/MMBtu

This week’s rally was helped along by an outage on TETCO, a major Appalachia southbound pipeline. TETCO was forced to reduce pressure on its 30” line segment due to the non-renewal of a special permit to operate at maximum pressure. A reduction of pressure led to lower gas flows from Appalachia to the Gulf Coast, thereby reducing volumes reaching the Henry Hub area. For further reading on TETCO, please read our recent post.

By our estimates, the daily supply and demand balance has loosened over the past few weeks. It is important to look at trends rather than a few weeks of natural gas stats, but we are paying attention to the implications for summer injections. If the market is more balanced on an ongoing basis, the current curve may be properly priced. However, if we return to a tighter market, the curve is still underpriced.

AEGIS hedging recommendations are unchanged from the previous week. For the balance of Summer 2021, we suggest swaps to most clients. In Winter 2021-2022, we recommend using collars; the price skew is to the calls, meaning the call has a relatively higher premium than the offsetting put. The benefit is close to 2:1 in favor of the producer.

Summer 2022 nearly closed at $2.75 on Friday. This level may be attractive enough to lock in with a swap for some clients. We hold the view that the Summer 2022 strip has more room to improve and therefore recommend using a collar. Considering the price rise, hedgers can now lock in a $2.60 X $2.83 costless collar (Friday afternoon indication). The collar quoted above may seem low compared to more nearby tenors, but a $2.60 put is about where the swap was not long ago.

To see details on factors we believe are affecting gas prices and trade recommendations, click the "Read More" button on the Factor Matrix section in the AEGIS Research Module.