Week Ending August 11

IEA Warns OPEC+ Cuts Could Raise Prices. Is $80 to 85/Bbl Oil’s New Range?

Oil futures posted a seventh straight weekly gain. September ’23 WTI contract gained 37c, or 0.45%, on the week to finish at $83.19/Bbl. Crude prices traded near 2023 highs as the market expects a large supply deficit in the year's second half.

Earlier this week, Ukrainian drone attacks on a Russian naval vessel and an oil tanker in the Black Sea endangered Russia's commodity exports. Russia's Novorossiysk port, a major oil export hub, faces potential disruptions affecting up to 2.5 MMBbl/d of crude and product exports.

On Wednesday, crude oil prices weakened following weak trade data from China. China's oil imports in July fell 18.8% to a six-month low of 10.3 MMBbl/d due to its sluggish economic recovery, housing and manufacturing slump, and the utilization of existing inventories. However, analysts expect a rise in China's fuel demand from August to October, driven by construction, manufacturing, and summer travel.

In its monthly report, IEA reiterated growing global oil demand due to strong summer air travel, increased oil use in power gen, and a surge in Chinese petrochemical activities. In 2023, demand is forecasted to rise by 2.2 MMBbl/d to 102.2 MMBbl/d, with China propelling over 70% of this growth. In contrast, July saw a global oil supply decline by 0.9 MMBbl/d to 100.9 MMBbl/d, mainly from OPEC+ cuts, particularly by Saudi Arabia.

OECD stocks are 115.4 MMBbl below the five-year average. With the IEA forecasting a 1.7 MMBbl/d deficit in the second half of 2023, and continued supply cuts from Saudi Arabia and Russia through September, we expect tighter market balances. IEA further added that "oil inventories could draw by 2.2 MMBbl/d in 3Q23 and 1.2 MMBbl/d in the 4Q23, with a risk of driving prices still higher" if output cuts persist.

With the cartel's extended cuts, our bullish outlook is based on the expectation of rising prices as supply-demand dynamics indicate a tight market due to significant inventory drawdowns.

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

Gas Nothces its Biggest Weekly Gain in Two Months

Natural gas prices climbed 7.5% or 19.3c this week to settle at $2.77/MMbtu. While prices softened on Thursday and Friday, gas traded above 3.00/MMbtu on Wednesday, the highest price in five months. The Winter ‘23/’24 seasonal strip rose 27c to $2.84/MMbtu, and the Summer ’24 strip finished the week higher by 17c at $3.39/MMbtu.

On Wednesday, gas prices surged by 18c to a five-month high. While prices settled that day at $2.96/MMbtu, they traded as high as $3.01/MMbtu intraday. The same day news of a planned Australian worker's strike at several LNG facilities sent prices in Europe and Asia significantly higher, although it is unlikely that this is what drove Henry Hub higher due to the regional disconnect of North American gas prices to global prices.

A more likely cause of the rally is the reduction in Lower 48 gas production combined with weather forecasts indicating continued above-average heat in the US. Gas output has been lower this week, averaging 101 Bcf/d, and Wednesday was the weakest showing at 100.3 Bcf/d. This is especially dramatic compared to Tuesday's output of 102.9 Bcf/d. This drop in production was, however, related to pipeline maintenance in the US Northeast.

On the matter of weather, Lower 48 average temperatures are expected to remain elevated to the 10-year average through the end of August. This should keep gas burns by the power sector elevated at around 75 Bcf/d through the end of the month, which is about 4 Bcf/d more than the five-year average.

AEGIS recommends hedging winter months with costless collars and summer months with swaps. Costless collars allow for upside participation, while swaps provide a higher level of protection. Collars also benefit from higher volatility seen in winter month contracts.