Week Ending December 17

This week, oil price movements were minimal as WTI recorded a net loss of 81c on the week to settle at $70.86. COVID continues to dominate the headlines. Analysts are trying to assess how the Omicron variant of coronavirus might affect demand. Cases of Omicron are spiking in many developed nations. The dent to oil product demand so far is minimal. However, the number of flights canceled since late November has jumped as the Omicron variant spreads.

There has been a growing concern that the global oil market will be oversupplied in 2022. It may already be happening. The WTI futures curve is signaling a looser supply and demand balance.  The prompt spread (month one compared to month two) recently flirted with contango. The curve as a whole is still in backwardation, but near-term oil contracts became weaker. This twist in the curve implies less demand relative to supply. Most of the flattening in the curve has been in the first six-to-nine months. The first half of 2022 has lost $5.30/Bbl over the past month, while longer-dated tenors have relaxed by around $3/Bbl.

The good news for a producer is that most price weakness has been for near-term oil, not for the tenors most AEGIS clients are now considering hedging. A month ago, Cal 2023 was $67.54/Bbl; as of Friday it settled at $64.27/Bbl. That’s only a $3.40 loss compared to January 2022’s $7/Bbl loss. 

AEGIS hedging recommendations remain swaps for Cal 2022 due to uncertainty around COVID and oversupply. Beyond Cal 2022, we suggest looking at costless collars, as there are scenarios where the oil market could be short supply.

Gas prices recorded a third consecutive week of declines as the weather disappointed the bulls. With a top-five warm October and a likely top-five warm December, the 4Q of 2021 would be the second warmest on record going back to 1950, according to Commodity Weather Group.

The weather has been about the least bullish it could be, but our measurement of temperature-controlled supply and demand shows a structurally tight market. For the past six weeks, we estimate that the gas market had been undersupplied relative to previous years on average. In other words, under the hood, the gas market is bullish. But, as stated before, weather trumps all. This does mean that cold snaps could result in rather large withdrawals from storage.

AEGIS hedging recommendations continue to be costless collars for all strips. The options market is still benefiting those deploying collars, as the call skew is relatively higher than in previous years.