Week Ending June 9

Oil Posts a Second-Consecutive Weekly Loss; Demand Concerns Counter Saudi Supply Cuts

The July ’23 WTI contract lost $1.57 or 2.2% on the week to finish at $70.17/Bbl. Prices failed to find much support despite Saudi Arabia's decision to voluntarily reduce its oil production by 1 MMBbl/d in July.

 Oil traded slightly higher at the beginning of the week following Saudi Arabia’s additional voluntary cut of 1 MMBbl/d for July with the option to extend it, while the OPEC+ cartel extended their exiting quota targets through December 2024.

An S&P Global survey showed that OPEC+'s crude production dropped by 0.67 MMBbl/d to 41.33 MMBbl/d in May, the first month of increased voluntary cuts. AEGIS believes that as the cuts start materializing more on the physical side, there could be outsized withdrawals from global inventories to offset the forecasted near 2 MMBbl/d deficit in 2H2023.

However, continued uncertainty over the demand outlook continues to weigh on prices. Crude prices saw a nearly 4% drop on Thursday following news of a possible Iran-U.S. interim deal, involving Tehran reducing its nuclear activities for relaxed sanctions. However, the prices recovered after the White House refuted the report. Additionally, China's weak inflation data, showing a lower-than-expected 0.2% growth in CPI and a 4.6% decline in PPI for May, has further intensified uncertainties surrounding crude demand.

AEGIS believes the oil market is excessively focusing on nearby bearish factors, such as economic concerns and banking fears. Despite these concerns, AEGIS expects market participants to be waiting on proof of bullish factors to show up in the data. The largest among these is the OPEC+ cuts that started in May. 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.

Fourth Coolest June Since 2000 Caps Gas Prices. Will July Break the Trend?

Natural gas prices finished the week 8.2c higher to $2.254/MMbtu as June weather trends below average. June is estimated to finish around 233 cooling degree days (CDDs) based of estimates by the Commodity Weather Group (CWG). If correct, this would land June as the fourth-coolest since 2000 – bearish. AEGIS has maintained that only bullish weather could send prices into a strong rally amid a backdrop of a well-supplied gas market. So far, this has not happened, but what about next month? Forward-looking weather predictions often carry low validity, but CWG points out that only two of the six cool Junes the U.S. has had in the 2000s have seen a hot flip in July.

On Thursday, gas traders expected a rather large 118 Bcf injection in storage. A sizable build is exactly what they got, except it came with some nuance. The EIA reported a 104 Bcf build, which included a 14 Bcf storage reclassification in South Central non-salt. The implied flow (or actual measurement for the reporting week) was 118 Bcf. Gas prices quickly surged on likely algo trading, reading the smaller 104 Bcf build, but promptly pared gains to trade lower on the day once the inventory report was digested. The gas storage surplus to the five-year average was extended to 353 Bcf and 562 Bcf over this time last year. The AEGIS summer end-of-season storage number still hovers around 4 Tcf.

AEGIS remains bearish through Cal 2024 as we think the market will remain well supplied. The highest form of protection is in the swap structure, but some call-skew remains in winter tenors that make costless collars attractive.