Week Ending September 10

Oil prices were mostly unchanged on the short holiday week. West Texas Intermediate settled Friday at $69.72, up 43c on the week. An announcement from China that they were releasing oil from their strategic reserve caused some volatility, but prices recovered on Friday as the market digested the news.

The effects from Hurricane Ida continue to ripple through the U.S. oil markets. According to the BSEE, Gulf of Mexico oil output was still at 76% of pre-storm volume, or 1.392 MMBbl/d, as of Thursday. A slow restart to critical onshore support facilities and the force majeure Shell announced on "numerous" crude delivery contracts has kept output offline. Downstream operations at some refineries continue to run at reduced rates. Despite the downstream outages, Ida is looking more like a supply event rather than a demand event. Hurricanes that hit the Gulf Coast have typically impact downstream operations longer than supply, as production usually returns quickly. What is usually a net bearish circumstance is, at least this time, a more bullish one.

AEGIS hedging recommendations are swaps, at least through Cal 2022. As mentioned last week, there are concerns that 2022 will be oversupplied, which could keep a lid on oil prices. Put skew is also not in the producer’s favor if entertaining collars. Unless you are bullish on price, swaps are our go-to structure right now.

This week, it was déjà vu again déjà vu again as the gas market gained another 22.6cc to settle at $4.938 on Friday. This follows the 32c rise last week and the 52c increase the week prior. Near-term price is up, but the curve is, too. Recently, a vertical shift in the curve implies a new phase to bullishness. Upward price action is no longer segmented to the front of the curve. Buyers are putting emphasis on 2022, as the demand side and speculators likely see undersupply as a more chronic issue.

Gas market tightness is worse, and prices have moved much higher, in Europe and Asia than here. If the global gas market is likely to be undersupplied, U.S. oil producers, who produce associated gas, may need to lend a hand to the gas market. In the U.S., Appalachia and Haynesville are the two major gas-specific basins. It's possible these two plays will not be able to provide enough gas on their own for growing gas demand in the coming years. Associated gas (read: oil) would need to fill the gap.

Today's gas market is tight versus previous years, and this winter's gas prices have soared. But consider next winter (Nov22-Mar23), currently trading $1.06/MMBtu lower than this winter's strip. As long as we don't get a mostly bearish weather pattern this winter, gas inventories will start next summer's injection season at a lower level than in 2021. We believe supply and demand will be similar in 2022 to 2021; therefore, next winter is probably underpriced.

Watch for production growth announcements for 2022. Because demand growth is largely project-based (LNG, Mexico imports), the amount of production growth could determine whether next winter will have enough supply to avoid high prices again.

AEGIS continues to recommend producers use costless collars for almost any tenor through 2023. The market has a tailwind, and call option skew is providing an additional benefit to collars. Consumers will need to be more cautious and think about using swaps throughout the curve to protect against a rising market.