Week Ending June 23

Oil Finishes Below $70/Bbl Amid Resurgent Demand Concerns

The August ’23 WTI contract lost $2.62, or 4%, on the week to finish at $69.16/Bbl. U.S. Fed’s hawkish stance on future rate hikes and other central banks raising rates, along with high crude exports from Russia and Iran, weighed on prices this week.

In his testimony this week, Fed Chair Powell reaffirmed that he sees at least two additional rate hikes before the year-end. Furthermore, a strong U.S. dollar also weighed on crude prices. The Bank of England, Norway's central bank, and the Swiss National Bank raised their interest rates this week, with England's hike of 0.5% exceeding economists' expectations.

Additionally, Iran’s oil exports hit 1.5 MMBbl/d in May, the highest since 2018, while Russia maintained strong exports of 3.66M barrels/day. However, the EU has issued new sanctions against illegal Russian oil exports, including restrictions on ship-to-ship transfers, possible bans on ships involved in such transfers from EU ports, and a ban on crude flow via the Druzhba pipeline.

However, signs of OPEC+ production cuts are beginning to show up on the physical market, with a noted decrease of 1.08 MMBbl/d output from OPEC's 13 members in May. This decline in supply, particularly from Middle Eastern members, may intensify when Saudi Arabia implements its 1 MMBbl/d cut in July.

AEGIS believes the oil market is focusing more on nearby bearish factors, such as economic concerns. Despite this, 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.

Gas Surges to Highest in Three Months

Natural gas prices finished the week higher by 9.7c to $2.729/MMBtu, settling at the highest level since early March. The Winter ’23/’24 strip closed 1c higher to $3.593, and the Summer ’24 strip finished the week up 5c at $3.346/MMBtu. This was the third consecutive higher weekly close in the NYMEX contract.

The South Central region, and Texas in particular, was impacted by a significant heat wave leading to a decent boost in demand from the power sector. Demand on the ERCOT grid was pushed to nearly record levels of more than 80-GW. However, the rest of the Lower 48 has been considerably milder than the South Central. So mild that this June is currently tracking to be the third coolest June of the past 20 years for the continental US. This has offset a large portion of the power demand, although forecasts indicate that not only will Texas remain hot next week, but hotter-than-average temperatures will expand beyond the South Central region to the Southeast and the Midwest.

After adjusting for weather, our measurement of the supply and demand balance has now been tighter than the five-year average for the fifth consecutive week. We have been closely monitoring this indicator as low natural gas prices will generally lead to higher gas burns by the power sector relative to coal. This dynamic may be what is driving the recent undersupply. If the rally in gas prices leads to higher levels of coal usage, then we may see the weather-adjusted balance flip back towards oversupply. Although, these recent data points are from weeks when LNG feedgas levels were depressed by about 2-Bcf/d due to maintenance at the Sabine Pass export facility. The return of LNG demand could tighten the market further.

AEGIS continues to recommend hedging summer months with swaps and winter months with costless collars. The recent tightness in the market does lend itself to a slightly more optimistic view of gas prices; however, it will be important to see how the power market reacts to higher gas prices, with next week’s data point likely providing much insight.