Week Ending June 16

Oil Posts a Weekly Gain, China's Stimulus and Fed's Pause Bolster Demand Outlook

The July ’23 WTI contract gained $1.61, or 2.3%, on the week to finish at $71.78/Bbl. Crude found support this week from signs of growing Chinese consumption, strong U.S. driving season expectations, and the Fed's halt in interest rate hikes. 

U.S. inflation slowed in May, with the inflation rate (CPI) at a two-year low of 4%. Meanwhile, the Fed, while keeping rates unchanged, hinted at a half-percentage-point increase by year-end. The dollar posted its biggest weekly drop since January, supporting crude prices. 

China lowered short-term interest rates following weak inflation data earlier this week, with an extensive stimulus package also being considered. The country’s industrial output rose by 3.5% year-on-year, and it’s apparent oil demand grew by 17.1% in May to 14.6 MMBbl/d Y-o-Y.

The IEA revised the global oil demand growth forecast upward by 0.2 MMBbl/d to 2.4 MMbbl/d, with nearly 60% of this growth attributed to China's demand rebound. Despite a slower economic recovery, China's oil consumption could rise, fueled by growing refinery capacity. The nation’s refinery throughput reached the second-highest on record in May.

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.

July '23 Gas Settles at its Highest Since Early March

Natural gas prices rallied to $2.632/MMBtu from $2.254/MMBtu, marking the highest weekly settlement since the first week of March, up 37.8c, or 16.8%. The Winter ‘23/’24 strip climbed 21c to $3.598/MMBtu, and the Summer ’24 strip rose 11c to $3.297/MMBtu.  

While temperatures have been unsupportive of gas demand lately—lower 48 forecasts only show them rising to the 10-year average at the end of June—Texas is set to experience the first heatwave of the summer. Electricity demand in the ERCOT system is expected to rise to record levels of 82.3 GW next week as air conditioning ramps up across the state. With wind generation in the South Central region still depressed, this increase in electricity demand will likely translate to a solid boost in gas demand.

In addition to weather-driven demand in the Southern US, market balances have been trending tighter over the past few weeks. We calculate the weather-adjusted supply and demand balance as undersupplied for the fourth consecutive week. This is likely due to gas occupying a high share of the thermal stack (natural gas + coal), driven by low gas prices displacing relatively higher-priced coal. If gas prices rise further, the share of the power mix occupied by gas would likely fall, returning the market to a balanced or even oversupplied level.

AEGIS continues to recommend hedging summer months with swaps and winter months with costless collars. We believe it is unlikely that the gas market will sustain an undersupplied level for very long and that any rally in forward prices represents an opportunity to add hedge volumes.