Oil prices gained 2.3% on the week to settle on Friday at $63.58 for the June WTI contract. Market participants appeared more upbeat on the global recovery in demand despite COVID hotspots like India. A report on Wednesday from Goldman Sachs likely helped buoy oil prices as the investment bank reiterated its bullish outlook for oil throughout the year. The bank forecasts Brent will reach $80/Bbl this summer amid rising demand.
AEGIS agrees that the global economy is poised for more recovery this year, given the pace of vaccinations and the reopening of economies. However, we would note that OPEC and its allies still have about 7% of the world’s oil supply sitting on the sidelines. The group has earmarked about 2 MMBbl/d to come back online over the next three months, expecting demand growth “recovery” for the remainder of 2021. OPEC+ has managed the oil market very closely; its current policy is reevaluated every month. It is possible careful supply releases from OPEC+ could keep prices stable at near current levels in concert with demand growth.
Hedging recommendations from the trading team lean toward utilizing swaps in the remainder of 2021 and 2022. Cal 2022 WTI nearly reached $60/Bbl on Thursday before retreating to $58.05 on Friday. If hedging into Cal 2023, we would suggest using costless collars to allow for upside participation.
The June gas contract finished higher for the third consecutive week, at $2.938/MMBtu. Just three weeks ago, June gas traded as low as $2.53/MMBtu amid weak space-heating demand and a looser supply-demand balance. This week the EIA reported a tiny 15 Bcf net build in U.S. gas inventories for the week ended April 23. Even though many analysts were expecting a bit lower at 10 Bcf, the 15 Bcf increase was the smallest injection in the past 21 years for the same week in April.
Our estimates of supply and demand have shown a continued tightening in the U.S. gas market since winter storm Uri disrupted both supply and demand in February. Stagnating production, record exports to Mexico, and strong LNG demand lead us to believe gas prices might have more room to rise. There are economic mechanisms that can limit some upside. As prices rise, gas demand loses market share in the power stack as coal eats into the gas utilization percentage. In the past, we have seen this loss of gas demand just above the $3 mark. Since 2015, only the Summer strip of 2017 (Apr-Oct) averaged over $3.00/MMBtu after settlement.
Considering the balance of the Summer 2021 strip has approached $3.00, up from 26c from a month ago, we now recommend using swaps. Summer 2021 is only 10c shy of its recent high of $3.082 observed during the week of winter storm Uri. Before February, the last time Summer 2021 reached $3.08 was 2016. We recommend hedging Winter 2021-2022 with collars to capture call skew (the relatively higher value the market assigns to call options versus put options) and to collar Summer 2022, which we see as undervalued.