Week Ending September 29

Oil Posts a 28% Quarterly Gain as Russian Fuel Export Ban Adds to OPEC Cuts

In a fluctuating week for oil, the November ’23 WTI contract gained 76c, or 0.8%, on the week to finish at $90.79/Bbl. With tightening supplies taking center stage, WTI and Brent recorded strong quarterly gains of 28.3% ($20.2/Bbl) and 27.3% ($20.5/Bbl), respectively, marking their steepest rise since the Ukrainian invasion in 1Q 2022. Shrinking inventories, resilient demand, and Russia’s ban on fuel exports tightening an already stressed fuels market supported oil prices.

On the storage front, U.S. crude inventories at Cushing, Oklahoma, the delivery hub for NYMEX WTI futures, have fallen by 0.9 MMBbl to less than 22 MMBbl last week, raising operational worries due to low stocks.

Meanwhile, Russia, the biggest seaborne diesel exporter, has stopped diesel and gasoline exports from Sept 21 indefinitely to curb rising domestic fuel prices. Bloomberg data indicates diesel loadings at Primorsk port are planned at 1.58 MMBbl for October, down from September’s 8.33 MMBbl. The ports of Novorossiysk and Vysotsk plan for 0.098 and 0 MMBbl in October, a decrease from 3.98 MMBbl and 1.80 MMBbl in September.

Furthermore, Deputy PM Novak said on Friday that Moscow is mulling stricter measures, such as export quotas and redirecting port reserves to domestic use if the recent export ban doesn't stabilize domestic prices.

Additionally, the fall maintenance season for US refiners is proving heavier than forecasted, with key players like Exxon Baytown, Motiva Port Arthur, and Shell Norco beginning turnarounds. As of this week, roughly 2.05 MMBbl of crude capacity is set to be offline from September to December, a bit less than 2.21 MMBbl last fall, according to Energy Aspects. Still, unexpected disruptions might increase this figure.

On the demand side, China's refineries increased crude throughput in September, especially ahead of the Golden Week holidays. State-owned refineries raised their utilization from 85% in August to 86.9%, amounting to a throughput of 9.3 MMBbl/d. After a record total of 15.3 MMBbl/d in August, the ongoing Golden Week holidays hint at an uptick in demand due to increased domestic and international travel.

The crude market has several moving parts, and considering Saudi Arabia’s significant role in buoying the market, tightening in the physical market, and low inventories, AEGIS recommends hedging WTI using swaps, given the rally in the WTI curve in recent months and the rising put skew. In the past, we favored hedging with costless collars.

Natural Gas Finishes Higher Despite Weak Shoulder-Season Demand

The prompt month (November) natural gas contract advanced 5c this week to settle at $2.929/MMbtu, with the October contract rolling off and settling at $2.76/MMbtu on Wednesday. Price action further out on the curve was muted as well, with Winter ‘23/’24 finishing the week 4c higher at $3.34/MMbtu, and the Summer ’24 strip also up 4c to $3.21/MMbtu.

Shoulder season dynamics are firmly in place, with gas demand expected to be limited over the next few weeks as temperatures remain moderate. Storage builds have already begun to accelerate, with the EIA reporting a 90 Bcf injection in this week’s inventory report. As it currently stands, Lower 48 gas storage is 189 Bcf above the five-year average, with this week's report showing the surplus expanding by a total of 6 Bcf. This should lead to inventories ending the injection season at a relatively healthy level, with our November end-of-season estimate currently at 3.78 Tcf, assuming 10-year normal weather.

There are about seven weeks remaining in the injection season, and for balances to move closer to the five-year average would likely require some early season heating demand in October. That currently looks unlikely as the two-week forecast going out to October 13 shows a total of 45 heating degree days, compared to the ten-year average of 77 HDDs over the same period. The two-week forecast shows a total of 95 cooling-degree days, slightly above the ten-year average of 87 CDDs. Unless forecasts begin to indicate temperatures more conducive to gas demand, price action should remain muted.

AEGIS continues to recommend hedging winter month contracts with costless collars and summer months with swaps. Costless collars benefit from higher levels of call-skew, which allows a producer to obtain a higher floor price on the collar. Winter ‘23/’24 skew levels are currently slightly above average, while Winter ‘24/’25 skew is one standard deviation higher than average.