West Texas Intermediate remained near its multi-year high this week after settling at $75.88/Bbl on Friday. Analysts are saying global oil demand could get a bonus 400 MBbl/d this winter due to gas-to-oil switching. These reports set a more bullish tone to begin the week. Record-high natural gas prices in Europe and Asia are causing electricity providers to look for energy source alternatives to gas. The most bullish Wall Street estimate comes from Bank of America, where the bank said oil could surge above $100/Bbl in the event of another cold winter.
Oil traders have now switched attention to next Monday’s OPEC+ meeting, where the group will discuss its current plan of returning production of 400 MBbl/d per month. As Brent crude has flirted with $80/Bbl, and oil balances could get even tighter this winter with gas-to-oil switching, OPEC+ may decide to add incremental supply beyond the 400 MBbl/d. Four OPEC+ sources said the cartel was considering adding more supply, with another OPEC+ source suggesting an increase of 800 MBbl/d was possible, according to Reuters.
Our general recommendation remains swaps for clients with little to no hedges or those wanting to raise their weighted-average position. We do recognize no two clients are the same, so upside-friendly structures like put options and costless collars may still be appropriate given the tight fundamental state of the market. Be advised, the natural “put skew” (opposite of gas) that exists in oil markets means that, on average, the downside protection lost exceeds the potential upside gained in a costless collar structure.
If your weighted-average floor is already at an attractive level, consider layering in a collar to allow for upside participation. Otherwise, take the swap and rest easy, knowing you are locked in above $70 for Cal 2022.