AEGIS webcast replay available! Please click here to watch.
During this AEGIS Webcast, our team discussed the breaking news out of OPEC + how might the UAE’s reported deal change oil-market sentiment? Then, how do you choose the right hedging protection when prices are rising? Plus, the natural gas rally may be presenting a free gift for producer hedging.
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The UAE, the lone holdout of a pending OPEC+ supply deal, agreed to a compromise with OPEC de facto leader Saudi Arabia this week. The compromise, which allows the UAE to raise its baseline quota starting in April 2022, paves the way for OPEC+ to finalize an agreement that would allow more production to return to global markets.
The anticipated agreement would bring a production increase of 400 MBbl/d each month for the remainder of the year. The uncertainty surrounding OPEC+’s cohesion has kept oil prices range-bound and volatile in the US, with WTI trading between $76.96 and $70.43 for the past two weeks.
AEGIS hedging recommendations continue to be swaps for the balance of 2021 and collar structures starting in 2022. We believe most of the price risk exists in the front six months, as demand is still recovering. Further along the curve, oil demand will likely have recovered, and the globe will need additional barrels from OPEC and non-OPEC, implying higher prices.
Gas fundamentals remain strong despite higher prices. The power sector is providing support as gas-fired demand is robust. The prompt-month (Aug ’21) contract finished the week unchanged at $3.67, while other tenors also saw minimal movement.
We remain wary of potential production growth going into next year and are focused on two areas in particular. Supply growth in the Permian and Haynesville plays together could surpass demand growth over the next 12 months. In our July 14 webcast (link above), we describe how non-weather demand growth is linked to projects and easier to forecast; production growth is likely to provide the supply-demand surprises.
AEGIS hedging recommendations remain swaps for the balance of Summer 2021 and costless collars in Winter ’21-’22. We suggest using costless collars in Summer 2022 to provide for possible upside. However, swaps in this tenor may have an advantage for some clients looking to add volume and raise their weighted-average floor.