Week Ending July 30

Oil prices rose for a second consecutive week, with the prompt-month (Sep ’21) WTI contract settling at $73.95/Bbl on Friday. The contract has recovered $7.60/Bbl after reaching a recent low of $66.35 during the July 19 selloff.

Concerns in the oil market surrounding the resurgence of the delta-variant coronavirus have been offset by tight global supplies. Key economic measures have been positive, and data has pointed to robust seasonal consumption of petroleum products here in the US and abroad. Potential COVID-related restrictions or lockdowns still exist, as cases from the delta variant surge. But, lower oil demand, due to the new COVID surge, has yet to show up in inventory and product usage in the US.

AEGIS continues to recommend swaps through the remainder of 2021 as prices have shown an eagerness to reside near current levels, but can drop suddenly. Looking further along the curve, we suggest using costless collars to allow for more upside participation. Oil demand continues to recover, as implied by the amount of backwardation in the forward curve, and our view is that prices realize higher in Cal 2022 and Cal 2023.

Natural gas prices pulled back this week through the Winter 2021-2022 strip as weather models turned progressively cooler. Prompt month natural gas finished Friday at $3.91/MMBtu, down 13c on the week. In contrast, both Summer 2022 and Winter 2022-2023 strips moved the other direction, climbing 8c and 11c, respectively.

Despite this week’s decline, gas prices have surged over the past few weeks. It is no surprise that prices would relax amid the cooler tilt in weather forecasts. Hot weather is still a possibility; the first week of August is expected to be cooler than average, but with warmer weather returning during the second week of August, according to Commodity Weather Group.

Adding to the downward Nymex pressure on Friday was a notice that Texas Eastern (TETCO), a pipe that flows Appalachian gas down to the Gulf Coast, would be allowed to again flow at maximum pressure on its 30-inch line. This enables more supply to reach the Henry Hub area, putting pressure on the benchmark’s prices. In contrast, this could improve Northeast producer’s basis pricing now that more takeaway capacity is available.

AEGIS recommends hedging with swaps for the remainder of Summer 2021 (Aug-Oct), a seasonal period where gas prices often see softness. Beyond the balance of Summer 2021, we recommend collars throughout the curve. A costless collar for the next two winter strips will take advantage of call skew in the options market. For Summer 2022, we recommend collars. A good example of the value is this: producers can now set floors at $3.00/MMBtu and still allow upside participation to $3.44 (mid-market) as of Friday. This implies slight call skew in the Summer, which is rare, and a hedging opportunity.