Week Ending August 27

This week, oil's +10% rally to above $68/Bbl was a swift, complete recovery of recent losses and it came without major fundamental news. The quick recovery perhaps demonstrates more optimism in the market sentiment about the Covid-19 Delta variants' impact on oil demand.

Earlier in the week, China reported no new Covid-19 cases after Draconian lockdown measures reduced the population's mobility. In the U.S., Covid-19 case data showed that overall cases might be reaching a peak. Moreover, a large and surprising draw in U.S. gasoline stocks reported this week suggests that product demand, at least domestically, was not as affected as previously thought. Oil market participants may feel like demand will only get better from here.

AEGIS hedging recommendations remain swaps for the balance of 2021. We start to recommend costless collars in 2H 2021, as this part of the curve and beyond looks to have the greatest chance of realizing higher than current prices. Cal 2022 doesn't come without risks. Non-OPEC supply growth was recently revised higher for 2022 by some major energy analysts. This could imply a looser balance in 2022 than previously thought. The demand recovery and growth pace are essential to watch over the next three to six months.

Gas gained 48c in two days this week. September rolled off the board at $4.37/MMBtu, marking the highest finish for the September contract in the last 13 years. It was also the largest weekly gain for prompt gas since November 2018.

This week's EIA gas storage report surprised even the most bullish analysts after the government reported a 29 Bcf build in stocks for last week. Salt domes on the Gulf Coast withdrew a whopping 15 Bcf for the reference week, putting salt storage at 229 Bcf, which is 105 Bcf below last year's level. Gas fundamentals remain tight, as confirmed by the low injection last week, but not much has changed in gas supply and demand to explain the over 50c weekly gain.

The sudden yank higher in prices stinks of trader action rather than pure fundamentals. It's possible that as prices started to move higher, traders had to adjust positions to cover short positions and stop their losses. This can happen with more severity near futures and options expiry, which were today and yesterday, respectively. Time is up; they have to get out. Situations like this can cause a market to move more than what is warranted from news and fundamentals alone.

As far as hedging recommendations are concerned, the gas market is still bullish, whether you look at a chart or fundamentals. Because the waning summer months and shoulder months are historically vulnerable to weather disappointments, we continue to suggest swaps for the last month left of the Summer 2021 strip. Beyond, it’s costless collars. Optimism in the gas market has provided a little more juice to the call-side of the options market; costless collars are therefore more attractive than usual.