Week Ending July 23

Oil prices made a stunning rebound this week following Monday’s massive 7.5% selloff. WTI settled Monday at $66.35/Bbl, but rallied back to close Friday at $72.07/Bbl, 26c above of the previous Friday settle.

Two factors drove the volatility. First, OPEC+ finally made a deal to increase its production into 2022, and secondly, the coronavirus delta variant spiked concerns that the demand recovery would stall.

On July 18, OPEC+ agreed to a deal that allows the group to proceed with further supply increases and increase the baseline quotas for five members, beginning in May 2022. Also, the group says it will increase output by 400 MBbl/d from August to December and then increase supply through September 2022 until the previously curtailed supply is returned. Their plan is interpreted by many as immediately bullish, because the set of 400 MBbl/d increases may be insufficient to satisfy what seems to be extreme tightness in the physical market. Further supply increases in 2022 will likely help keep supply and demand more balanced as the sharp recovery in oil demand is slated for the 2H2021, before moderating.

AEGIS hedging recommends swaps for clients looking to add volumes in the balance of 2021. For Cal 2022, trading near an average $65/Bbl, we continue to suggest costless collars to allow for some upside participation. Cal 2023 is trading at $60/Bbl as of Friday; we also recommend upside-friendly structures like collars for these tenors.

It was a fantastic week for gas producers, but stressful for the unhedged consumer. The August Nymex contract rose 26c on the week to an eye-popping $4.06/MMBtu as of Friday’s settle. Interestingly, the August contract is only a few cents under the Winter 2021/2022 strip price of $4.10.

The gas market has been buoyed by hot weather across many parts of the Lower 48 amid a tight supply-demand backdrop. Over the past two months, anomalous warmth has put natural gas storage on a path to exit injection season in November between 3.4-3.5 Tcf, materially below what analysts would consider a “neutral” starting point for the winter season.

Looking at the Summer 2022 strip, we see price risks skewed to the upside. Next Summer is trading at $3.15/MMBtu as of Friday. Earlier AEGIS analysis identified $3.00/MMBtu as price where we would expect fundamental and technical resistance, but that estimate was before hot June-July weather chewed through extra supply.

The price spread between January 2022 and April 2022 (the peak-winter contract and first contract of the Summer 2022 strip) is the widest in the past 12 years at this point in the year. AEGIS believes that the Winter 2021/2022 rally was warranted based on fundamentals and has staying power.  If it does, Summer 2022 may trade higher from here.

AEGIS hedging recommendation are swaps for the balance of Summer 2021 strip, collars in Winter 2021/2022, and collars in Summer 2022. The collars in winter take advantage of the option call skew, a benefit for producers. Collar recommendations in Summer 2022 is to allow for more upside participation, given that we see possible upside from here for that tenor.