Week Ending January 21

Crude oil prices moved higher again this week, even trading at a seven-year high of $87.91 for WTI on Wednesday. The now-prompt March contract settled Friday at $84.87/Bbl. Analysts and pundits have a growing sense of optimism for oil prices in 2022. This week the IEA, who advises governments on energy policy, boosted their oil-price outlook for 2022.

Echoing the more bullish tone set by the IEA, some Wall Street banks are also calling for oil to go higher. Morgan Stanley says $100/Bbl later this year. On Monday, Goldman Sachs similarly forecasted oil prices to hit $100/Bbl later this year and continue rising in 2023. The overarching thesis for bullish sentiment is a global lack of supply growth. Many doubt OPEC+’s ability to produce to their stated capabilities, and the U.S. is only expected to grow moderately, unlike growth trajectories of the recent past.

On the other side of the equation, demand is forecast to remain strong, and COVID-related demand destruction due to Omicron has been less than what many expected. The aforementioned IEA also said that global oil markets look tighter than previously thought due to a less severe COVID variant and unplanned global supply outages. The agency hiked its oil-demand growth forecast for the coming year by 200 MBbl/d, to 3.3 MMBbl/d. The new revision reduces the amount of oversupply expected in 2022.

The crude oil landscape may seem risked to the upside from what the current futures curve shows, and we agree with that. However, we have to consider that many bullish factors are already priced into this market, and a possible surplus in parts of 2022 is genuine. Risks remain, and so does uncertainty.

As it pertains to hedging structures, AEGIS recommends swaps for the first six months of 2022 and collars thereafter. Suggesting collars for the second half of 2022 is an update from previous weeks. We moved our timetable up for the collars as we see more upside risk in later 2022 than previously thought. A swap in 2H2022 is $78.21 (mid) as of Friday afternoon. An indicative costless collar structure was $70 on the Put and $84.70 on the call. There is slight punishment in the put-call skew, but nothing out of the ordinary.

The prompt-month (Feb ‘22) Henry Hub contract has taken it on the chin this week despite the 206 Bcf draw for the week ending January 14, as reported by the EIA on Thursday. The draw took us to 2,810 Bcf, 226 Bcf below last year, but still 33 Bcf above the five-year average. 

Constructive weather has kept demand elevated and production challenged over the week as snowmageddon engulfed the East, followed by frigid temps in the Midwest, but not enough to reverse the downward trend in price. 

The February contract lost just over 30c on the week as weather runs trended slightly warmer in the two-week outlook, with little support coming from the February and March forecast. Weather forecast revisions are typically the source of gas volatility in the winter, particularly as we approach February Nymex expiration. The sell-off we saw early in the week can be partly attributed to the "less cold” east coast forecast, but the out-sized price move left us searching for another catalyst. 

With December in the books as the warmest on record, the market might have gotten a little over-exuberant over frigid January forecasts and prospects for a cold February. U.S. gas production has dipped over the month to 92-93 Bdf/d while demand and LNG exports remain strong, but overall winter 21/22 supply vs. demand is about 5 Bcf looser than winter 20/21. With returning supply (ex January), each forecast revision warmer seems to take price materially lower, while there isn’t the same incentive for upward price moves on cooler forecasts.