Crude Oil Bottom Line
Oil hedging activity has quieted recently. Some volumes have been traded ahead of the end of 3Q as clients catch up to internal policies or levels required by lenders. Note to those with WTI CMA exposure (almost all U.S. oil producers): You can add complete October hedges all the way through September 30. It’s also possible to add partial-month hedges, even on or after October 1.
We still encourage the use of swaps, rather than options structures, through 1H2021. Bearish forces are more pronounced during this span, and put options are expensive.
In 2H2021, some costless collar combinations look more appetizing. Even at a reference bid price of $42.40 intraday Friday, a collar could be had for about $35 X $48.40. By combining 3Q2021 and 4Q2021, you also take advantage of an upward-sloping curve. The 4Q can subsidize the 3Q.
We’re urging those with few hedges in Cal ’22 to look for opportunities to add volumes during rallies or when option values provide good collar combinations. Some clients are behind schedule – which is always a delicate problem to mitigate when prices are suppressed.
The AEGIS team fielded a few calls about the effects of a potential Biden administration. We maintain a summary of energy-related policy announcements here. We believe the net effect of Biden policies could be bullish for price, but only because it would add costs to develop and maintain oil production. See below for more Factors affecting oil prices.
Crude Oil Factors
Election. A Biden presidency could add costs to oil & gas producers, which would support prices, even though the industry could face operational challenges.
However, we speculate that a Biden administration may lessen or remove sanctions against Iran. Perhaps 1.5 MMBbl/d of supply could return.
The Biden-Harris platform includes proposals to eliminate emissions in power generation by 2035. Kamala Harris has framed her environmental platform around the Green New Deal – even pledging to eliminate the filibuster to get it passed. This factor remains in the surprise category and of smaller impact as it’s a more longer-term variable. A potential change in the U.S. stance vis-à-vis Iran is the notable exception.
Covid-19 Demand/Economy. Demand recovery remains a concern. Recently, this concern has focused on Europe. After several major energy analysts have reduced their global oil-demand outlook, we believe this Factor is mostly priced-in. We recognize the pace of demand recovery is unknown, even to the best forecasters. But there is consistency among analysts that petroleum demand could not return to normal until the end of 2021. It remains a bearish Factor.
OPEC+ Cuts & OPEC+ Spare Capacity. Most recent Saudi commentary announced OPEC would continue to enforce supply quotas until everyone complies. Our view remains OPEC+’s management of its supply policy is not bullish and has the potential to weigh on prices for a while.
USD. Oil price is typically supported by a declining USD. The dollar’s value fell through end of July but has rallied in September. We’re labeling this Factor as a bearish surprise. If the USD rises in value, watch out for WTI to take a hit.
Excess Inventory. Every nook and cranny on the planet filled with oil this spring. Weakness in Brent forward structure shows oversupply in the spot market and near-term forwards. If the international supply-demand balance improves and the Brent curve flattens, we fear that global oil inventories will squash a rally by dumping barrels on the market. That overhang of supply is still bearish, but breaching storage limits is now less of a risk.
Oilfield Services & Capital Markets. If demand recovers, the oil market may be faced with less supply and an inability to serve demand. With oilfield services understaffed, and providers of capital reticent to take a risk on energy, production may not be able to respond quickly to a price signal. Therefore, we view these two Factors as potential bullish surprises. We expect the timing of these Factors’ importance to be heightened toward the end of 2021.
Middle East Hotspots. Libya has indicated it may stop blockading its own oil exports and renew production output in the coming months. The country’s potential +1 MMBbl/d of production would weigh heavily on this market that is only barely remaining in balance.
Production Decline. Our first thought may go to the U.S., but global non-OPEC supply potential has likely diminished in the last six months. We think this Factor is well-understood and is priced in, but if production declines continue, the market may start to panic and send prices higher. Think of this as a late 2021 risk and balanced against the speed of demand recovery.
We continue to monitor oil, gas, NGLs, regional markets, jet fuel, and interest rates for hedging opportunities. To learn more and see AEGIS opinion and recommendations, go to AEGIS View publications, or contact email@example.com. Like what you see? Share this article with the button on the bottom right of your desktop. Market questions or comments? Contact us at firstname.lastname@example.org.