Week Ending August 13

West Texas Intermediate finished the week mostly unchanged from the previous Friday's close of $68.28. However, price was volatile; WTI traded within a $5/Bbl range amid demand concerns stemming from the latest Covid-19 surge.

Prominent energy analysts made material changes to their supply and demand forecasts in response to the surge in global coronavirus cases. In their monthly Oil Market Report (OMR), the Paris-based IEA forecast lower global oil demand growth and increased OPEC+ and non-OPEC supply growth, "stamping out lingering suggestions of a near-term supply crunch or supercycle."

The IEA doubts OPEC+ can bring back its production as it has planned. "If the bloc continues to phase out its cuts," IEA concludes, "OPEC+ would pump 1.7 MMBbl/d above the call on its crude in the first quarter of 2022, assuming Iran remains under sanctions." OPEC and its allies have previously announced a plan to raise output by about 400 MBbl/d each month through about September 2022.

Goldman Sachs (GS) researcher's conclusions are much different. In a note to clients, GS said they view the delta variant's impact to demand as more transient, recovering in 4Q2021.

Also this week, OPEC's research team published similar thoughts on demand, leaving demand unchanged for 2021 and 2022. However, OPEC's monthly report showed a large increase in non-OPEC liquids production of 800 MBbl/d from 2021 to 2022, with most of the monthly upward revision attributed to U.S. production. 

AEGIS has not changed its view that the crude market looks more vulnerable in the near term than prices further down the curve. Over the past month, the nearly 10% pullback in price has likely reflected known or assumed impact from the delta-variant surge and resulting lockdowns.

Hedging recommendations remain swaps in the near term due to demand recovery risk. For 2022 and beyond, costless collars remain our suggestion as the curve remains steeply backwardated, and we believe the market will realize higher than the curve.

The September Henry Hub natural gas contract fell 27c to $3.87, Friday to Friday. We have not observed any meaningful fundamental shift to explain the price decline. It seems cooler weather forecasts are mostly to blame, with the possibility of some profit-taking after a strong rally. Late last week, the 15-day weather forecasts were quite bullish. As these weather models moderated, traders likely peeled back positions. Wind and nuclear generation also had sizable increases over the past week, reducing how much natural gas could participate in the power stack, serving as another potential factor that could have led to this week's losses.

Despite natural gas's biggest weekly loss since February, the underlying fundamentals remain solid. Gas in underground storage remains 178 Bcf below the five-year average and 548 Bcf from year-ago levels. In addition, AEGIS's weather-controlled S&D models show a consistently tight market. The tight supply and demand trend should continue as production growth remains subdued, and LNG export growth is expected to rise by 2 Bcf/d over the next 9-12 months. With some cold weather this winter, gas prices could race higher through Winter 2022-2023.

AEGIS hedging recommendations remain swaps for the balance of Summer 2021 and November and collars for any contract months beyond. Typically, costless collars recommendations are reserved for the winter strips due to the invariable call-skew. But we lean bullish on the next two summer strips and suggest collars as an instrument to allow for more upside participation. For consumers, Summer 2023 in particular and beyond likely have more upside than downside potential; therefore, swaps are advised here.