Week Ending September 1

Crude markets shrug off China risk and focus on tight supplies

West Texas Intermediate closed out on Friday, September 1, at its highest level since November 2022. The crude market focuses on tight supplies despite headline risk from China and higher supply risks from sanctioned OPEC members.

OPEC+ cuts continue to be the dominating force in helping tighten the market and reduce global inventories. Market participants have come to expect Saudi Arabia to roll over its 1 MMBbl/d cut to October. For evidence of market tightness, stocks at Cushing, Oklahoma, have been rapidly declining, down 14.07 MMBbl to 29.165 MMBbl since late June. Current Cushing levels are only 4.8 MMBbl higher than the seasonal low point in the past eight years. Total U.S. oil inventories have also been on a rapid decline, indicative of global stockpiles.

As WTI has reached a 10-month high, nearby time spreads have also rallied to yearly highs. The prompt spread (Month 1 to Month 2) has risen to $0.78/Bbl, a significant shift from -$0.20/Bbl in late June. Rising nearby prices above future contracts can be a signal of a tightening physical market.

AEGIS recommends hedging WTI with swaps as the WTI curve has materially rallied in the past two months, and put-skew has increased. Recently, we have been more in favor of hedging with costless collars, which allowed for a bullish bias to play out. However, WTI has now rallied above $85/Bbl, and there is a higher-than-normal put skew (the larger penalty for producers who have to sacrifice more downside to the same amount of upside participation).

September is expected to be the fifth hottest of the past 20 years

Natural gas prices advanced this week as weather models looked into September and indicated continued heat for much of the US. The October contract gained 11c or 4% this week to finish at $2.76/MMBtu. The Winter ‘23/’24 strip fell 9c to $3.51/MMBtu, and the Summer ’24 strip closed 4c lower at $3.26/MMBtu.

Much of this week's rally has likely been due to the anticipation of August’s heat extending into September. Weather models currently indicate that September could be the fifth hottest in the last 20 years. This is in stark contrast to how summer began, with the third coolest June of the past 20 years. With much of September’s heat concentrated in the population-heavy Midwest and Eastern US regions, gas demand is expected to remain elevated even in a month that generally marks the beginning of the shoulder season. Power sector gas demand in the Northeast is expected to rise to 11.2 Bcf/d next week from 8.6 Bcf/d today. Gas demand in the Midwest, South Central, and Southeast regions is expected to remain firm as well.

The continued heat in July and August has helped erode some of the surplus in gas inventories, although Lower 48 inventories remain 249 Bcf above the five-year average. A hot September is likely to help further reduce the surplus; however, even with the next two weeks of weather factored in, our end-of-season estimate for gas inventories is 3.8 Tcf.

AEGIS recommends hedging natural gas with swaps in the summer months and costless collars in the winter. Swaps provide a higher level of protection, while collars enable a producer to retain some upside potential.