Week Ending September 15

Oil Rockets Past $90 With an Even Tighter Market on the Horizon

Oil finished above $90/Bbl for the first time in ten months, driven by a combination of resilient global demand and tightening supplies, especially with Saudi Arabia and Russia extending their 1.3 MMBbl/d output cuts through December. October ’23 WTI contract gained $3.26/Bbl, or 4%, on the week to finish at $90.77/Bbl.

Driven by consensus that output cuts from Saudi Arabia and Russia would result in a supply deficit through 2023, OPEC+ and the IEA projected deficits of 3.3 MMBbl/d and 1.2 MMBbl/d, respectively, for the last quarter of 2023. The extended OPEC+ cuts could lead to the removal of approximately 119.6 MMBbl of oil from the market in 4Q2023.

However, oil’s gains were possibly capped by a strengthening dollar, which rallied to a new six-month high. Furthermore, the market broadly expects the Fed to hold rates steady later this month.

Demand outlook found support as China’s crude processing hit a record 15.3 MMBbl/d in August as refiners ramped up rates, boosting fuel exports. Also, China's Central Bank cut the reserve requirement ratio by 25 bps to bolster the economy, which showed signs of stabilization in August from consumer spending and stimulus measures, although property market concerns persisted. Concurrently, the US retail sales beat market expectations, and the ECB raised its main refinancing rates to 4.50%, indicating a potential end to its rate hikes.

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.

Freeport LNG's Return Drives LNG Consumption to Multi-Month Highs

Natural gas prices edged 3.9c higher on the week and settled Friday at $2.644/MMBtu. A couple of bearish and bullish items helped offset each other this week and keep the price volatility low. First, since last Friday, the weather has continued to trend cooler on average, causing future demand estimates to be pared. Second, the EIA natural gas inventory report showed an injection of 57 Bcf, while historically bullish, was higher than most analysts expected. Helping to offset these two items was the return of Freeport LNG intake volumes.

The highly anticipated weekly inventory statistic for gas showed a looser supply and demand balance than analysts anticipated. Going into Thursday morning's EIA announcement, the median analysts' estimate was 50 Bcf. The EIA reported a 57 Bcf injection, contributing to intraday price softening in Nymex. Total working gas in underground storage now stands at 3,205 Bcf, which is 203 Bcf above the five-year average. Anomalous heat in July and August has helped reduce the sizable surplus in gas storage that was observed in early Summer. In fact, in the last 129 years, the July-August combo ranked 6^th hottest for the Lower 48.

Freeport LNG returned to nearly full rates on Friday after taking in much less gas than usual over the past week. The facility was estimated to consume about 1.86 Bcf/d on Friday compared to a low of 0.273 Bcf/d on Sunday. The unexplained reduction in flow caused multiple LNG vessels to pause offshore and wait to load or be redirected. The return of Freeport LNG has allowed total Lower 48 LNG consumption to reach 13.3 Bcf/d, a level not seen since early July.

AEGIS remains bearish on the forward curve through this coming winter and Cal 2024. Bullish pressure from the demand side in early 2025 through 2027 dictates our upside-leaning view in these tenors.