Week Ending June 30

Oil Sees Weekly Gain Despite a Second Straight Quarterly Decline

The August ’23 WTI contract gained $1.37, or 3%, on the week to finish at $70.54/Bbl. U.S. Fed, along with other central bank’s hawkish stance on future rate hikes, weighed on prices this week. However, a large U.S. inventory draw of 9.6 MMBbl, far surpassing Bloomberg's 1.2 MMBbl estimate, supported prices.

Central bank chiefs globally agreed on Wednesday to further tighten monetary policy to combat high inflation, confident it wouldn't trigger recessions. Federal Reserve Chair Jerome Powell and European Central Bank President Christine Lagarde signaled continuous rate hikes in the US and Europe. Powell further emphasized that most Fed policymakers expect two more 25 bp rate hikes this year.

Additionally, moderate demand recovery from China hasn’t helped oil’s bullish thesis.

AEGIS believes the oil market continues to focus more on near-term bearish factors, such as macroeconomic concerns. However, signs of physical market tightening have started to surface. Eight of the 13 core OPEC members implemented a production cut of 1.1 MMBbl/d in May, and Russia curtailed its output by 0.4 MMBbl/d, despite maintaining resilient exports (likely sourced from storage). Moreover, Saudi Arabia's voluntary production cut of 1 MMBbl/d, effective from July 1, could augment the prevailing market tightness.

Global oil data, typically on a one to two-month lag, show that as of April, OECD industry stocks remain 86.4 MMBbl below the five-year average. Furthermore, OPEC projects a 2.4 MMBbl/d growth in global oil demand in 2H2023, while supply may only rise by 0.5 MMBbl/d. Our bullish view is based on the expectation of rising oil prices when supply-demand dynamics indicate a tight market from significant inventory drawdowns to balance the deficit.

AEGIS recommends costless collars for adding oil hedges, allowing for upside potential in line with our bullish outlook. However, given each portfolio’s unique needs and risks, we encourage you to consult your strategist to identify your most suitable strategies.

Gas Finishes Lower, Ending a Streak of Three Consecutive Weekly Gains

The prompt month (August) natural gas contract fell 4.5c, or 1.58%, to settle at $2.798/MMBtu, breaking a three-week streak of consecutive higher weekly settlements. There was limited movement in the Winter ‘23/’24 strip and the Summer ’24 strip; however, there has been significant selling further out in the curve. The 2027 calendar strip fell 13.3c to $3.799/MMbtu, and the Cal ’28 strip fell 13.6c to $3.701.

The South-Central region and specifically Texas, continued to experience significantly hotter than average weather this week, which pushed electricity demand in the ERCOT system to a new record high of nearly 81 GW. Despite loads on the power grid being higher this week, gas burns were lower week-over-week due to higher output from renewable sources. Wind generation has suffered from the below-average output for much of the summer so far, however a rebound in wind generation this week pushed net load (or the remaining demand after subtracting wind and solar) to about 5 GW less than on June 20, when ERCOT power prices spiked to more than $4,500 /Mwh. This dynamic kept a lid on both gas demand and power prices.

Additionally, FERC announced this week that Mountain Valley Pipeline has been approved to proceed with all construction activity. This follows the pipeline’s inclusion in the US debt ceiling bill, which mandated that the permitting process for the project be streamlined. Developers of the pipeline said they will begin mobilizing construction crews this summer, with the intention of bringing the pipeline into service by the end of 2023. The debate over the pipeline has begun to shift towards the Southgate extension, which would expand the pipeline into North Carolina.

AEGIS recommends hedging the summer months using swaps and the winter months with costless collars. Given that the last few weeks, we have calculated the weather-adjusted supply and demand balance as being undersupplied, we have a slightly more optimistic view on prices for the balance of summer, although higher gas prices may incentivize reduced gas burns relative to coal, pushing the market back towards oversupply. We retain our bearish outlook for the 2024 Calendar strip.