Market Summary - Week Ended September 17

WTI gained on the week to $71.97, a fourth consecutive weekly increase. Crude prices found support this week with signs of a tighter market and more positive sentiment surrounding COVID-19.

Lingering effects from Hurricane Ida have resulted in more bullish crude inventory stats as Gulf of Mexico oil production was still reduced by over 500 MBbl/d as of Thursday. This likely a temporary issue.

For the medium term, market consensus is that the global oil market will remain undersupplied at least through the remainder of the year, helping to support price. Oil balances in 2022 are more uncertain. OPEC believes there will be an excess of 1.6 MMBbl/d on the market on average in 2022. In its latest monthly report, OPEC did revise 2022 demand higher by almost 1 MMBbl/d, closing the gap on what the perceived imbalance could be next year.

Most of the negative sentiment involving COVID-19’s impact on oil demand seems to be waning. The delta variant spooked many market participants as the virus reduced oil product demand across the globe in 3Q. However, Asia has seen a solid recovery from these delta cases. Cases and hospitalizations in the U.S. have likely moved past the recent peak and now are on a 14-day average decline. Signs that the worst of the delta variant is behind us have probably lent support to the market.

AEGIS hedging continues to recommend swaps for most clients across the forward curve.

This week, natural gas hit a new multi-year high of $5.46 before giving back some gains to end the week up 17c, to $5.10. The Winter 2021-2022 strip rallied 14c to $5.28.

However, the curve twisted, an annoying development for the gas producer. Longer-dated tenors felt more selling pressure than nearby ones, with Winter 2022-2023 falling 12c to $3.81. Gas prices dropping in outer years while the front rises by nearly 20c can imply several things, but here are two: First, traders could be expecting more production in outer years due to high prices in the front. Or, hedging activity from producers could be helping to push down prices.

Turning focus to the international gas markets. Both European gas benchmark TTF and Asian market JKM, have reached new record levels for this time of year. Dutch TTF gas futures settled Thursday at $21.82/MMBtu, while the Japan-Korea Marker finished at $23.42/MMBtu.  There are already signs of demand destruction in Europe due to high power and gas prices. Two U.K. fertilizer plants halted work this week, citing high gas prices, with no estimate for when their production would resume.

For gas producers, AEGIS recommends hedging with collars, as upside risk remains and the options market is valued so that selling call options is rewarded. Consumers should remain defensive and utilize swaps to de-risk.