Week Ending April 1

West Texas Intermediate booked its largest weekly loss in over ten years falling -$14.63/Bbl. The Biden administration’s decision to release an additional 180 MMBbl from strategic reserves pushed WTI to settle at $99.27/Bbl on Friday. This was the first WTI settle below $100/Bbl since March 16.

Early in the week, news that Russia had agreed to back away from the Ukrainian capital of Kyiv helped push oil lower. De-escalation in Russia and Ukraine's conflict stands to reduce fears of energy disruption.

On Wednesday, the U.S. announced that it would be releasing 1 MMBbl/d for six months to combat high gasoline prices. President Biden has been under pressure to combat inflation and the rise of prices at the pump, where gasoline costs $7/gal in California. The 180 MMBbl release from the U.S. Strategic Petroleum Reserve would be the largest in history. The release is on top of the 30 MMBbl Biden promised to supply the market in early March.

The WTI forward curve moved in an unfamiliar fashion following the announcement from Biden about SPR. Typically, longer-dated contracts or tenors move in sympathy with – i.e. in the same direction as –more nearby tenors. The front of the curve is where most of the liquidity resides, and the “backs” usually follow the direction at some ratio. In other words, if the first six months of WTI futures are higher on the day, the longer-dated tenors will be up as well, just less so. However, on Thursday and Friday this week, the WTI curve twisted. That is, the more nearby contracts came under heavy selling pressure because of Biden’s SPR announcement, and Cal ‘23 and Cal ‘24 rallied. The price action is consistent with the idea that sellers of SPR crude oil will have to buy back at a later date or an SPR release now means less supply availability in the future, which is more bullish.

AEGIS hedging recommendations are collars for the remainder of 2022 as call-skew remains for the year's balance. We advise using collars for producers adding volumes in 2023 and 2024 as we see that part of the curve as undervalued.

The bullish price momentum of the last several weeks is alive and well; gas futures kept their upward trajectory this week. The prompt-month (May ’22) contract picked up another 15c on the week to finish at $5.72. Further, the Summer ’22 and Winter ‘22/’23 also picked up 19.3c, and 22.1c to $5.82 and $5.90.

Why so much strength? Our theory is that once winter demand fades into the background, all that is left are non-weather factors, and those are stacked in the bull’s favor. For several months, we have been preaching that this market is tighter than many give it credit. Today’s higher prices may reducer power-generation demand this summer, as coal could gain market share. However, we are also starting from a lower inventory level, which means more upside may be possible, especially beyond the Summer ‘22 strip. In short, this coming winter’s setup could be even more bullish than last year’s.

AEGIS continues to recommend collars throughout the curve to take advantage of the option-volatility skew that is currently very pronounced in the gas market. Further, the forward curve is extremely backwardated into next year, with Summer ’23 at a $1.90 discount to the preceding winter. Collars for Summer ’23 allow for exposure to the upside, while protecting budgets with a hard floor price.