Week Ending May 19

Oil Notches First Weekly Rise in a Month; Tight Supply Prospects Eclipse Immediate Demand Worries

Oil snapped a four-week losing streak to finish higher. The June ’23 WTI contract gained $1.51 or 2.16% on the week to finish at $71.55/Bbl. The market is keeping a close eye on the U.S. debt talks and Chinese demand recovery. Hopes for a debt ceiling deal, fueled by comments from President Biden, eased some concerns about the U.S. economy.

President Biden and key congressional leaders are working to increase the debt ceiling before the June 1 deadline. Signs of progress in these talks have bolstered prices, with House Speaker McCarthy hinting at a potential agreement over the weekend.

Meanwhile, the IEA's monthly report indicates China's oil demand is growing faster than expected, a trend that could lead to a hike in oil prices if supply doesn't keep pace. The agency has also raised its global oil demand growth forecast for the year by 0.2 MMBbl/d to 2.2 MMBbl/d. Regardless of concerns about the demand recovery pace, refineries are working near their peak capacity in expectation of a demand bounce back.

In Alberta, wildfires are escalating, threatening 2.7 MMBbl/d of oil, with about 0.3 MMBbl/d currently halted. The fire count increased from 86 to 92 this week, and conditions may worsen despite the improving weather.

In the U.S., plans are underway to buy 3 MMBbl of sour crude oil in August to refill the SPR after selling nearly 200 MMBbl last year to curb fuel prices. Despite the bullish news, it's expected not to make a big impact as analysts anticipate the process to be slow and the volume small compared to global crude stocks.

AEGIS believes the oil market is excessively focusing on nearby bearish factors, such as economic concerns and banking fears. Despite these concerns, AEGIS expects that market participants on proof of bullish factors to show up in the data. The largest among these is the OPEC+ cuts set to take effect this month and next. Our bullish view is founded on the notion that oil prices will rise once daily supply and demand dynamics indicate a tight market due to significant inventory draws.

AEGIS recommends costless collars as the instrument of choice for adding oil hedges. Collars will allow for upside participation, given our bullish bias. However, every portfolio has different needs and risks, so please talk with your strategist about what structures work best for you.

Gas Soars to Highest Since March

Natural gas prices surged to the highest level in several months this week. With the prompt month June contract settling 31.9c higher at 2.585/MMBtu on Friday. Prices across the forward curve moved up, with the Winter ‘23/’24 strip higher by 11c to $3.645/MMBtu and the Summer ’24 strip settling 11c higher at $3.359/MMBtu. While prices moved up steadily most of the week, the largest gain came on Thursday when gas posted a 23c rally following the release of the EIA’s weekly storage report.

This week’s storage number caught many market participants off guard, coming in at 99 Bcf, which was 9-Bcf smaller than the median analyst expectation, according to the Bloomberg survey. While a 9-Bcf miss is not particularly large, it is a potential sign that market balances could be moving towards a less oversupplied level, especially since LNG feedgas demand was down by about 2 Bcf/d from record levels for the report week.

In addition, we calculate this week’s storage report as being undersupplied on a weather-adjusted basis by about 1-Bcf/d. Although the supply-demand balance is still trending oversupplied, this week’s storage report and last week’s rig count decline may have led some market participants to hold a more bullish view of the gas market, leading to this week’s move higher.

AEGIS still holds the view that the natural gas market will be well supplied on average throughout 2023 and 2024, barring a material downward change in production. Given the rally in forward pricing, we believe this is a good opportunity to add volume in Cal ’24, which is up about 10c over the past week.