Oil prices were volatile during the week ending July 9, as an ongoing OPEC spat kept traders nervous. There is still no agreement between Saudi Arabia and the UAE regarding supply increases from OPEC. Traders had briefly interpreted the cancellation in OPEC+ talks Monday as bullish, with WTI touching $76.98 in early Tuesday morning trading. However, oil spiraled lower to $70.76 as the oil markets worried over a potential premature rise in OPEC+ production if the group could not reach consensus. However, the market apparently does not expect a full OPEC breakdown; WTI recovered to $74.56/Bbl by Friday’s settlement.
There may be some supply uncertainty, but demand recovery in the US continues. EIA this week reported a seventh consecutive weekly draw in oil inventories. More impressive was a record-setting gasoline demand figure. Helped by drivers returning to the roads for the Independence Day holiday, gasoline demand rose to 10 MMBbl/d for the week ended July 2, the highest-ever reading for this time of year. The stat suggests easing economic restrictions and high vaccination rates have led Americans to return to their pre-pandemic lifestyles.
AEGIS hedging recommendations are as follows, for most clients: For the balance of 2021, we suggest using more conservative structures like swaps due to uncertainty in the market. For a Cal 2022, we continue to believe that the inertia is still to the upside from the current strip price of $65.85 for WTI and suggest using more upside-friendly structures like costless collars. Cal 2023 still hovers around $60 due to the curve’s steep backwardation. Costless collars are our default Cal 2023 recommendation for most of our clients due to what we believe is upside potential from current prices.