Week Ending December 27

Crude prices remain stuck in tight range

WTI finished the shortened trading week up 82c to $70.60/Bbl, but prices have not moved much over the past several weeks. This is now the tenth week with prompt prices stuck between $68 and $72 as the market awaits a new catalyst to move prices. News headlines were limited this week, and liquidity was low given the mid-week holiday and proximity to the end of the year.

US crude inventories have continued to draw, with storage levels below the five-year range following this week’s reported draw of -4,237 MBbls. Inventories are now at a deficit of 26.30 MMBbls to the five-year average. This follows the trend of declining OECD inventories over the past few months. However, prices have not improved much despite continued draws and below-average storage levels. Draws in developed countries may have counteracted some of the continued bearishness from weak Chinese consumption, keeping prices where they are. However, it is important to note that global inventory data is delayed by a few months and that storage levels may begin to rise if OPEC goes through with its plan to start restoring production in April.

AEGIS continues to hold a neutral outlook on prices in 2025 and 2026, with a bearish lean in the Cal ’25 strip, given the possibility of significantly higher supply. We recommend that clients hedge any price rallies aggressively and maybe look at costless collars if prices in the low $60s are acceptable.

The January contract rolled off the board at $3.51/MMBtu, but not before nauseating many traders with high volatility. Gas futures for January briefly traded above $4.00/MMbtu on Thursday before paring gains into a settled price of $3.71/MMBtu. Volatility was likely attributed to traders' positioning around volatile weather forecasts and this week's low liquidity due to the Christmas holiday.

The price action for this January’s contract has us thinking about next winter. Yes, we have had some cold materialize and show up in the forecast, but fundamentals aren’t necessarily screaming bullish. Inventories are still 166 Bcf above the five-year average, basically the same level we were at this time last year. Production is down year-over-year but still hovering near 104 Bcf/d. There is one new LNG facility ramping up in Plaquemines, but it’s still in its early stages at only 0.5 Bcf/d so far. It begs the question. If January 2025 gas can hit $4.00/MMbtu, or even average high threes, what will next January trade? By next December, Plaquemines should be talking about 1.7 Bcf/d along with Corpus Christi Stage 3 consuming material volume. Also, Golden Pass LNG could be on the cusp of starting up, ramping LNG feed gas demand even higher. Combine the new LNG volumes with the likelihood that inventories will likely be at or below the five-year average this time next year, which could spell a recipe for higher observed prices. The January 2026 contract is currently trading at $4.56/MMbtu. That’s only about 56c higher than what we experienced once this week for the January 2025 contract. The bottom line is that the future looks bullish, starting next winter and into Cal 2026.

From a hedging perspective, utilizing collars for the Winter ‘25/’26 strip looks attractive for producers. The call-skew is advantageous at nearly a 2:1 ratio (meaning if you give up 30c of downside protection, you could get 60c of upside participation). Cal 2026, as a whole, is carrying a good amount of call skew that supports collars versus swaps. A swap at $3.89 for Cal 2026 is nothing to scoff at, but due to palatable call-skew and our fundamental outlook, we would favor the collar here and allow for more upside.