Week Ending January 28

Crude prices remain a beauty despite the roller coaster that brought it down $6 in the early part of the week. The March contract settled above $87.00 this week. Bal'22 is now above $80.00, and Cal '23 is better than $73.00. Headlines focusing on a possible Russian invasion of Ukraine have generated the most conversations with our client base this week. We feel that the Russia-Ukraine situation has added a couple of dollars in risk premium to the near-term contracts; however, we don't see material oil supply disruptions causing sustained price spikes.

The EIA's inventory report was generally bullish despite a crude build of 2.4 MMBbls for the week ending January 21. Gasoline stocks built less than expected while distillates drew by more, leaving overall products inventories 10% below last year’s levels. In addition, total US production came in at 11.6 MMBbl/d vs. 11.8 MMBbl/d at the end of December, with freeze-offs in the Permian likely to blame. Overall, low products inventories and higher demand have played a role in strengthening crude prices.

Bullish sentiment isn’t without headwinds, though. There have been news reports that producers can increase dividends at current prices while accelerating drilling activity and increasing production and very well may do this while not highlighting it. These types of headlines aren’t surprising, given the run-up in crude prices over the last six weeks.

Globally, there are still questions surrounding the actual spare capacity of the OPEC+ group. OPEC meets next week (February 2), and the consensus is another 400 MBbl/d increase. It will be interesting to see if the gap between quotas and actual production grows as true OPEC spare capacity remains one of the most-watched wild cards for the balance of 2022.

Our trading recommendations remain swaps in the first half of 2022 and collars beyond. While backwardation is currently at extreme levels, the upside risks in those tenors make the potential upside from a collar worthy of a minor penalty. A 2H2022 costless collar is printing around $70 x $85.80, in contrast with a swap of $78.70, and Cal 2023 at $60 x $84.35 versus a swap of $73.20. The real takeaway is that put skew isn’t too penalizing and is slightly better than its historical average.

If you haven’t heard by now, you’re going to think this is a misprint (and you should be reading the AEGIS First Look).

The February NYMEX natural gas contract expired and settled on Thursday at $6.265, up $1.988 on the day.

It looked like a normal up-day, with prices gradually moving higher. But then: fireworks. At exactly 1:00 PM Central, bids came into the market to drive the contract to over $7.20. Then it dove back below $6.00. Because trading ended at 1:30 PM Central, the timing of the run encourages a lot of skeptical questions. But the pressing matter is what it does to hedges and your price protection.

Take a look at this article, which goes into more detail. What you’ll read is that your NYMEX gas settlements (already sent by AEGIS) may be frightening. But also, if you hedged basis, there may be some better news next week.

We are here to talk you through any of the details. Further, if you need to figure out ways to mitigate some cash-flow issues or change hedging terms to avoid these issues in the future, we have some concrete steps to take.

If you need to add gas hedges, costless collars deserve your first consideration. The relative value of put options and call options makes the collar construction beneficial in many ways. Check out this week’s webcast for some deeper explanation.