Week Ending September 8

OPEC+ Cuts Spark Oil Rally to Ten-Month Highs. Is There More to Come?

Oil finished Friday at a near ten-month high in the wake of decisions by Saudi Arabia and Russia to extend their voluntary production cuts through the end of this year. October ’23 WTI contract gained $1.96, or 2.4%, on the week to finish at $87.51/Bbl.

Saudi Arabia will extend its production cut of 1 MMBbl/d through December, leading to an output of 9 MMBbl/d for the quarter. Similarly, Russia will extend its voluntary export cut of 0.3 MMBbl/d until the end of December. Both nations will review the cut decisions monthly and may deepen cuts or increase output based on market conditions, according to SPA and Russian Deputy PM Novak.

The market had anticipated a deficit of 1.2 MMBbl/d to demand for 4Q2023. With the introduction of these new cuts, approximately 119.6 MMBbl of oil will be removed from the market in the fourth quarter, widening the deficit to nearly 2.5 MMBbl/d.

Following the announcement of the cut extensions, both oil benchmarks surged to ten-month highs. WTI peaked at $88.08/Bbl and Brent at $91.15/Bbl. However, gains were somewhat limited due to the US dollar's rise, which hit a six-month high on Friday.

As Fed officials prepare to hold rates steady later this month, they remain wary of the risks associated with excessive rate hikes. Meanwhile, despite recent gains, concerns about China's economy affecting crude demand persist.

AEGIS recommends hedging WTI using swaps, given the rally in the WTI curve in recent months and the rising put skew. Previously, our recommendation favored hedging with costless collars, which allowed a bullish outlook to unfold.

Gas Gives up Last Week's Gains as The Hot September Forecast Evaporates. 

Prompt month gas prices finished the week 16c lower at $2.605, with most of the selling pressure occurring on Tuesday and Wednesday. Prices fell across the curve, with Winter ‘23/’24 down 9c to $3.41 and Summer ’24 down 4c to settle at $3.22. 

Last week, weather forecasts showed September as potentially being one of the hottest on record. Friday’s two-week forecast was for a total of 191 cooling-degree days (CDDs). However, over the three-day weekend, the forecast shifted significantly cooler. Tuesday morning’s forecast showed 170 CDDs, but weather models continued to see temperature forecasts lowered, with today's forecast only showing 144 CDDs. This implies significantly lower demand than was anticipated a week ago. 

While the next two weeks may see lower temperatures, this week's heat again stressed power grids. The ERCOT grid reached a record power demand level for September and issued a Level 2 emergency alert for the first time this summer. The alert occurred on Wednesday evening as available capacity fell below 2 GW. The evenings have been particularly challenging for the grid because of solar output falling off; however, this week's issue was attributed to stress on transmission lines, which restricted the amount of power flowing from south Texas to north Texas, according to Bloomberg. Power generation from natural gas surged during the event to 51 GW. 

AEGIS recommends hedging summer months with swaps and winter months with costless collars. Winter month contracts have higher levels of call skew, which can provide a producer with a higher floor on the collar.