Week Ending October 15

WTI reached a new seven-year high Friday, settling at $82.28/Bbl. If you are considering hedges for late 2022 or 2023, there is an emerging opportunity in the curve that you should consider.

First, the bad news, WTI is near the steepest backwardation in the past five years. The good news is that the recent rally has overcome the backwardation by about $7/Bbl if you look out a year from now. For example, the December 2022 contract was $63.45/Bbl on September 1 and is now $72.75/Bbl as of Friday. This is despite $9/Bbl of backwardation in the first 12 months of the curve.

It’s tempting to think you are getting punished with the steep backwardation, but 13^th month of the WTI curve is now higher than the rolling prompt contract has been in the past seven years except for a brief period in 2018!

We have previously flagged a sharp rise in non-OPEC supply, driven mostly by the U.S., as a potential contributor to oversupply in 2022. In their latest monthly report, OPEC decreased forecasted U.S. petroleum production by 100 MBbl/d.

But, it has not changed their production plans. Earlier this month, OPEC again reaffirmed its pace of bringing back 400 MBbls/d each month. However, the cartel and its partners are falling short of their quotas. In September, the group produced 650 MBbl/d less than planned.

We have to ask: If $80 Brent doesn’t encourage you to produce, might you not have the capacity?

Let’s begin with an assumption that we believe is wrong; the natural gas forward curve reflects the “proper” price. In other words, it's efficient.

What are 2023 prices telling us about the current state of gas supply and demand? In the last week, the curve has twisted. November pricing was nearly unchanged on the week. In contrast, Cal 2023 was up 11c to $3.61. We don’t know exactly what Tier 1 acreage location breakeven prices are, but judging by the exuberance with one-on-one calls with clients, we suspect it is under $3.61/Bbl. Is the curve pricing in the probability that Tier-2 and Tier-3 are needed to supply the gas market in the next couple of years?

Here are two other possible causes of a rising and twisting curve. Number one, the demand side of the market is finally waking up and noticing possible scarcity that could extend beyond this winter. Number two, there could be some hedges unwound in the back of the curve. For example, stories moved on Friday that EQT is unwinding some of its hedges. That’s a BIG hedge book. AEGIS notes these unwinds, whether options or swaps, end up supporting prices out the curve, because the offsetting trades are purchases of forward contracts.

AEGIS hedging recommendations for producers remain costless collars throughout most of the curve. Call-skew still dominates and is providing unique opportunities to utilize collars.