Week Ending September 24

Oil prices rose through most of the week, with Brent, the international benchmark, trading at $78.23, its highest mark since October 2018. Oil market sentiment is very positive; we expect most traders think market tightness will likely persist in the short term.

Supply issues in the Gulf of Mexico still remain. North of 200 MBbl/d is expected to remain offline through the rest of the year. Destruction and outages caused by Hurricane Ida have displaced a total 30 MMBbl of supply over the last four weeks in the Gulf. Adding to supply-side pressures, OPEC+ production has been lower than agreed as some members struggle to ramp up production.

The crude market also has some possible tailwinds this winter amid a global energy crunch. The surge in natural gas prices, especially in Europe and Asia, could force some consumers in those markets to switch from gas to oil products for power generation. Investment bank Goldman Sachs estimated that global oil demand would rise 900 MBbl/d in October-March if winter temperatures were one standard deviation below seasonal norms, and gas-to-oil switching would only exacerbate an already tight oil market.

There are still risks to oil prices that could move lower, against the bullish sentiment. Flare-ups of COVID-19 and accompanying flu season this winter could renew concerns about demand, even as more and more of the world's population is vaccinated. OPEC+ is set to increase production in monthly increments of 400 MBbl/d for the foreseeable future. Yet, the cartel meets monthly, and if prices continue to rally, it may decide to flex with more supply to cool down prices.

AEGIS trading recommendations remain swaps for most clients as prices remain elevated at multi-year highs.

Natural gas finished the week nearly flat, settling at $5.14 on Friday. The Summer 2022 and Winter 2022-2023 strips made impressive gains, reversing last week's price action. In recent weeks, the front of the gas curve (Oct-Mar) has been somewhat disconnected from more longer-dated tenors.

The bulls have recently taken control of the gas market, and price skew potential is to the upside this winter. But the speculators should be nervous. Even a warm start to winter could deflate bullish optimism. The past five winters have seen three of the hottest U.S. winters in the past 127 years. But, gas bulls can take solace in this winter's Farmers Almanac prediction. 

Underlying fundamentals remain strong, and with 2 Bcf/d of new LNG capacity expected over the next nine months, market tightness should persist.

AEGIS continues to recommend option structures for most producers looking to add hedges. Market consensus is higher chances for more upside to prices, and call options are bid.  Producers, take advantage of this. If you’re a consumer of gas, it’s tricky. This winter, the obvious hedge may seem to be call options for protection against further price increases, but volatility is high, and call options are outrageously expensive.Consumers will likely need to focus on swaps this winter, and AEGIS can figure out the right volume. Options structures start to make sense farther into the future.