Week Ending November 19

Oil prices came under heavy selling pressure during the week, settling at $76.10/Bbl, down $2.91, on Friday. The Biden Administration has continued to threaten government intervention to lower fuel prices. Also, Covid cases in Europe surged, increasing the chances of more mobility restrictions.

President Biden has spent many weeks trying to talk down the price of oil. He has threatened to release oil from the U.S. Strategic Petroleum Reserves (SPR) and asked the Federal Trade Commission (FTC) to investigate the U.S. oil industry for price gouging. According to Goldman Sachs, the U.S. is expected to sell 20-30 MMBbls of oil from SPR, and other countries will accompany the U.S. by releasing another 30 MMBbls.

Simply the threat of governments selling strategic reserves seems to have impacted the oil markets by at least $3-5/Bbl. Still, many analysts conclude that the released volumes will only provide short-term relief.

AEGIS hedging recommendations continue to be a mix of swaps in early 2022 and a heavier push toward upside-friendly collars in 2023 as we see the possibility of supply shortages in this time frame.

Gas prices remain volatile. The prompt (Dec) contract traded 27.4c higher on the week to settle at $5.065/MMBtu. Natty has been very sensitive to fluctuations in the short-term weather forecasts.

Weather now has an asymmetric effect on price, or net-bearish skew in our view. Suppose there were two scenarios where weather forecasts were to show demand 10% higher or 10% lower. We expect prices would decline more on the 10% lower-demand forecast than rise on the higher-demand forecast.

Why do we think this? There is currently a fear premium baked into gas prices. The demand side has been buying gas, anticipating scarcity and high prices. The 1Q22 strip still holds much of that fear premium even though it is now much lower than what it was in early October. (We estimate the fear premium using options metrics, and we’re happy to demonstrate the method if it would benefit you.)

Even though some of the risk premium has fallen out, measurements of the supply and demand balance show that the gas market is tighter than what it was six weeks ago. Fundamentally the gas market is bullish, but, like all winters, weather will likely be the dominant cause for any rally and greater volatility this winter.

AEGIS hedging recommendations remain costless collars throughout the curve. Call-skew still dominates, and this benefits producers. Another strategy to ponder in the near term would be buying outright puts. Why puts? First, there is little time-value (theta) left in these options, coupled with more call skew, making the puts relatively cheaper than in the past. Second, you can set your net floor (strike minus your premium owed) at relatively high levels and leave yourself all the upside. Please reach out to your trading rep if you would like more information.