Week Ending November 5

Prices dipped this week in what appears to be a correction rather than a fundamental-led start of a downtrend. Supply and demand are still apparently mismatched, with consumers scrambling to find oil.

This week, several macroeconomic events worked against outright oil prices. OPEC met in its monthly meeting, but it was boring, with no surprises. However, the Fed also met, and the market is assuming an end to bond buybacks soon, which could lift medium-term interest rates and the value of the U.S. dollar. This would be bearish for oil prices, all else equal.

Meanwhile, trade flows could have pushed oil lower. News came out that Mexico’s hedging program had been working through the market. Call us skeptical, but if it’s in the news, it’s probably over. Still, if banks are laying-off risk, it shows up as sales in the forward curve, pushing it lower.

Last, U.S. oil stocks grew last week, per the EIA and API. Cushing’s inventories are still near their historical lowest and falling; however, total U.S. stocks ticked higher, perhaps hinting at supply and demand coming closer together.

Our recommendations are generally costless collars for hedges, whether producer or consumer, with the possible exception of the next few months in the curve. Producers, if you still need some December or 1Q2022 hedges, the high price of oil may be too good to pass up. Beyond that, into 2022, collars maintain upside price exposure while providing good protection. In 2023, we still like collars, but with a warning: Producers should weigh the backwardation “penalty” against the upside exposure. In many cases, floors (the put option strike) dips down to the low $60s or upper $50s. If that’s not tolerable, swaps are your best choice.

Gas prices have oscillated, but like a spring, are keeping to a range. We are encouraged that the gas forward curve is holding steady in summer 2022 and beyond, so those high prices are consistently available for a producer to hedge.

Winter weather is about to take over as the dominant force in price, volatility, and the shape of the curve. Why? If November is mild, the likelihood of supply shortfall in spring is less likely. Less fear means less volatility for the start of 2022, which means Summer 2022 and Winter 2022-2023 strips would be likely to follow, going lower.

Prices ended up very little changed in gas this week. Our recommendations also stay the same. Costless collars are outstanding value for a producer, in any tenor. Contact the AEGIS desk if you need to take a closer look. Consumers of gas need to be careful. A cold start to winter could send prices higher, and quickly. Let’s talk about stop-loss strategies, considering how expensive collars and call options are right now.