Week Ending July 7

Oil Surges $3.22/Bbl on the Week as OPEC Cuts Start to Bite

The August ’23 WTI contract gained $3.22, or 4.6%, on the week to finish at $73.86/Bbl. Extended production cuts from Saudi Arabia and Russia, along with a weak dollar, supported prices this week. However, fears of future rate hikes to curb high inflation and China's slow economic recovery capped oil's gains.

On Sunday, Saudi Arabia extended its 1 MMBbl/d production cut from July to August and hinted that it might extend its cut further if needed. Concurrently, Russia announced that it would reduce its oil exports by 0.5 MMBbl/d in August.

AEGIS believes that despite short-term macroeconomic concerns, the oil market is showing signs of tightening. Core-OPEC members and Russia cut production by nearly 0.9 MMBbl/d and 0.4 MMBbl/d in May, respectively, which could tighten the market further along with Saudi Arabia's July voluntary cut.

Additionally, while OECD industry stocks remain 86 MMBbl below the five-year average, the IEA forecasts crude demand to exceed supply by 2 MMBbl/d in the second half of 2023. 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. WTI’s curve structure is signaling that the oil market is getting tighter. The prompt WTI contract has moved into backwardation for the first time since May. The so-called prompt spread has been in contango for the majority of 2023.

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.

Natural Gas Rig Count Trend Reverses

Natural gas prices settled 21.6c or 7.72% lower at $2.574/MMBtu on Friday, while the Winter ‘23/’24 strip fell 10c and the Summer ’24 strip closed lower by 5c. These are the lowest prices in the past two weeks, during which they traded between $2.60/MMBtu and $2.80/MMBtu. Prices fell by 4c on Friday alone, following the release of the weekly Baker Hughes rig count, which showed a substantial increase in gas-directed drilling rigs.

This week’s natural gas rig count showed the first increase in drilling activity in nine weeks. This data point is surprising because most large public producers have guided towards lower drilling activity, which has so far been corroborated by rigs coming down each week, starting with the decrease of 16 rigs in early May. While this will not translate into an immediate increase in production, it is not a data point bulls will favor.

The EIA’s natural gas storage report showed a build of 72-Bcf, although due to a 4-Bcf reclassification of base gas to working gas in South Central non-salt, the implied flow for the week was 68-Bcf. This brings the storage surplus to 366-Bcf above the five-year average and 575-Bcf above year-ago levels. This high level of gas in inventories should keep the market relatively insulated from price spikes.

AEGIS continues to recommend hedging the winter months with costless collars and the summer months with swaps. Using costless collars in the winter provides additional value due to higher levels of call skew or the relative expensiveness of calls to puts, allowing for a higher floor price in the collar.