Market Summary - Week Ending December 31

Crude prices continued to recover losses incurred during the “Black Friday Selloff,” climbing another $1.66 on the week to finish near $75.21. The prompt-month contract is still around $8 removed from its multi-year high of $84.65 reached on October 26, 2021; however, recent price movements are encouraging and show prices are heading in the right direction with some momentum.

Rising COVID-19 cases have continued to dominate headlines. However, there has been some optimism: data show vaccines are somewhat effective against the new Omicron variant, and the illness is thought to be less severe. Crude oil demand has been relatively resilient, as lockdowns have been sparse. Flight cancellations have been a growing concern, but they result from a shortage of workers rather than government orders to stop travel.

There are still several factors that could impact oil prices in 2022, including but not limited to OPEC+ strategy, U.S.-Iran nuclear talks, and the pace of U.S. production growth. Still, demand will likely be the most significant driver moving forward. As a result, some analysts have lowered their 2022 price forecasts in anticipation of slowing demand growth and a robust supply response to higher prices.  

Our default recommendations remain swaps throughout Cal ’22 as prices are attractive at current levels, with all contracts trading firmly above $70. Beyond Cal ’22, we recommend costless collars as several fundamental bullish headwinds could send prices higher than the current curve.

Gas prices can often make some interesting moves in the last week of the year. Contract expiration, volatile weather, and a lack of liquidity during a holiday week are typically contributing factors to choppy markets, and this year was no exception.

The January ’22 contract managed to keep its head above the $4.00 mark, expiring at $4.02/MMBtu on Wednesday. February ‘22 Henry Hub gave up a meaty 29c in its first trading session as the prompt contract to end at $3.56/MMBtu. That’s 46c lower than the January settle. The overall weekly deterioration in prices decreased the backwardation in the remaining winter months, putting the balance of winter in line with the summer strip.

Weather this winter has been mild and bearish so far, but there are many dark winter days left. We maintain that the gas market is structurally tight, leaving the possibility of bullish storage withdrawals on any cold snap.

AEGIS has recommended costless collars for all tenors on the basis that call skew has made these structures attractive. Call skew remains above historical averages, and we maintain these recommendations as we continue to see this value in the options market.