Week Ending August 25

Speculation of Supply Rebound and Demand Woes Counter Bullish Fundamentals

With signs of a supply rebound and weak demand due to China's subdued growth and Europe's lackluster economic data, oil futures saw their second straight weekly dip. The September '23 WTI contract lost $1.42 or 1.7%, settling at $79.83/Bbl.

Fed Chair Powell's remarks on interest rate outlook largely aligned with markets’ expectations. Powell reiterated his message from earlier this year that further tightening is on the table to return inflation to 2%. Additionally, the U.S. dollar surged to a ten-week high, further weighing on crude prices.

Thanks to shadow diplomacy, U.S. officials have privately acknowledged easing some sanctions on Iranian oil. This led Iran to increase its crude production to a five-year high of 3 MMBbl/d in July (IEA), targeting 3.4 MMBbl/d by September. As they find fewer buyers, Iran's exports to China have reached a decade high, ranging between 1.5 and 2 MMBbl/d, reported Kpler and TankerTracking.

Furthermore, US-Venezuela talks about relaxing sanctions in exchange for fair elections next year, coupled with renewed talks between Iraq and Turkey to restart a key oil pipeline with a 0.5 MMBbl/d export capacity for Kurdish crude, have weighed on prices.

As the 'Fragile Five' OPEC nations (Iran, Iraq, Libya, Nigeria, and Venezuela) are expected to add nearly 0.9 MMBbl/d both this year and in 2024, Citi's Ed Morse pointed out potential long-term growth, especially for Iraq and Venezuela. However, with China's slow growth dampening demand outlook, OPEC could be compelled to curb production further.

Marathon is shutting the third-largest oil refinery in the US after a fire. The Garyville refinery has a refining capacity of 0.596 MMBbl/d.

Over the last two weeks, crude prices weakened following macro developments, even as supply-demand fundamentals generally point to a tighter second half. OPEC+'s output fell 1.2 MMBbl/d in July to a two-year low, with analysts expecting Saudi to extend its unilateral cuts. OECD stocks stand 115 MMBbl below the five-year average, with preliminary data pointing to further draws in global inventories for July and August.

Our bullish outlook is based on the projected deficit in the second half, which could result in outsized inventory withdrawals, driving up prices. This is further emphasized by the cartel's ongoing production cuts and the current supply-demand dynamics signaling a constrained market.

AEGIS recommends using costless collars for oil hedges, allowing upside potential in line with our bullish view. Given every portfolio's distinct risks and needs, we encourage you to talk with your strategist to determine the best-fit strategies.

Record Temperatures Stress US Power Grids

Natural gas prices settled lower this week, but only by 1.1c, with the prompt contract finishing the week at $2.54/MMbtu. Winter ‘23/’24 fell slightly more, down 4c to $3.59/MMbtu. Prices have retreated almost 50c in the last few weeks after reaching $3.00/MMbtu on August 9.

The Midwest and South-Central regions continued to grapple with record heat and power demand.  Cooling degree days (a proxy for weather-driven demand) in the Midwest region reached 19 this week, 10 CDDs more than the 30-year average. Temperatures in Texas have been above average for several consecutive weeks now, averaging 26 CDDs, compared to an average of 20. While the two-week forecast indicates the heat will fade from the Midwest region, significantly reducing gas demand on the MISO system, Texas may continue to face above-average temperatures into September.

These temperatures sent power demand higher this week on both the MISO and ERCOT systems, boosting gas demand in both regions. Power sector gas demand in Texas has continued to hold above 8 Bcf/d, while the Midcontinent region reached 8.5 Bcf/d.

For a few days this week, ERCOT’s supply and demand forecast showed potential tightness in supplies during evening hours. At times, they even forecasted a supply deficit. This tightness occurs because solar power starts to decrease in the evening while loads and temperatures remain elevated.

If there are more thermal outages than normal or less wind generation, supply can be heavily reduced. This increases the call on natural gas power plants and encourages even inefficient gas plants to run at full capacity.

AEGIS recommends hedging the summer months with swaps and the winter months with costless collars. The swap will provide more protection, while the collar will allow upside participation. We have recently developed some tools to help determine how good or bad a costless collar is, which you can read about here.