Week Ending October 6

Economic Jitters Drive Oil to Lowest in Over a Month

Oil saw its biggest weekly loss since March. November ’23 WTI lost $8/Bbl this week to finish at $82.79/Bbl. Prompt month Brent and WTI fell by about 11.5% and 9% this week, respectively, as concerns about the growth in the economy overshadowed supply constraints.

Demand uncertainty in the oil market is growing due to economic concerns, even though oil prices surged 27% since July, only to retract to the low $80s. However, AEGIS believes that such price pullbacks could trigger more proactive discussions within OPEC. Unilateral production cuts from Saudi and Russia are set to last through December, and if Brent remains at $85 or below, it could serve as a catalyst for OPEC to step up its interventions.

Despite no new change in the US Fed’s rhetoric, the recent bond sell-off raised concerns over higher interest rates for longer affecting future economic growth. Concurrently, the US dollar index reached a new 11-month high of 107 on Tuesday, making dollar-denominated oil more expensive for foreign buyers.

Losses in the crude market were exacerbated after the EIA reported four-week average implied gasoline consumption fell to 8.3 MMBbl/d last week, the lowest seasonal rate in 25 years. The RBOB-WTI crack spread fell to $7.75/Bbl, the lowest since 2020, before rising back to $9.60/Bbl on Friday. Gasoline cracks were already weak amid the conclusion of the summer driving season and the transition to winter-specification gasoline.

AEGIS believes the EIA’s implied demand calculations, influenced by factors like production, exports, imports, and especially last week’s 6.5 MMBbl build in gasoline stocks, may be overstated. Timing differences as gasoline transfers from primary sources to retail via the 'rack’ can see direct demand metrics diverge in weekly data. However, they tend to align more closely on a monthly scale.

Furthermore, Goldman Sachs' ethanol blending analysis indicates that 9.1 MMBbl/d of finished gasoline entered the market, surpassing the EIA's estimate by 0.76 MMBbl/d.

On the supply side, Russia allowed a return of seaborne diesel exports after imposing a ban on Sept. 21 that strained an already tight fuels market. Shipments can resume, provided that they are delivered to ports via pipeline. Producers must, however, keep 50% of diesel production domestically. The new terms will release about 90% of the pre-ban volumes, roughly 0.63 MMBbl/d, according to Kpler.

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. In the past, we favored hedging with costless collars.

November Natural Gas Soars 40c in One Week

The November NYMEX Henry Hub contract has posted a substantial gain since becoming the prompt month contract. Prices are higher by 38c this week to $3.30/MMbtu and up 43c over the last two weeks. Winter ‘23/’24 prices have been more subdued, up 10c to $3.62/MMbtu, but Summer ’24 has advanced by 31c to finish at $3.39.

There are a few factors that have likely contributed to this rally. Firstly, weather forecasts have shifted to support a more bullish demand setup than had been previously forecasted for October. While this month is considered a “shoulder” season month, there can be material swings in gas demand for space heating. Following a particularly hot September, initial forecasts for the first two weeks of October showed incredibly mild weather relative to the 10-year average in terms of gas-weighted heating degree days. This week, forecasts firmed up and are indicating October to be much closer to historical averages.

The storage surplus has been considerably reduced due to a hot July-August and high gas burns from the power sector. This week’s EIA report came in more bullish than the market anticipated at 86 Bcf vs a median expectation of 94 Bcf, according to the Bloomberg survey. Storage levels are currently 172 Bcf above the five-year average, which is a much smaller surplus than existed in early summer. Inventories should end the year at a comfortable level above the five-year average (3.75 Tcf is our current estimate) but not nearly as bearish as early projections showed.

Contributing to this week’s rally is lower gas supply. Gas production has fallen below 100 Bcf/d this week and is now down year-over-year, based on data from S&P Global’s Pointlogic. While this recent drop in production is likely to be maintenance-based, production has stagnated this year, averaging about 102 Bcf/d. Lower gas production is a potentially bullish factor we have been monitoring, and while output may bounce back once maintenance events conclude, this week's weak production numbers may have spooked some market participants.

We continue to view swaps as a more favorable structure for hedging summer seasons and costless collars for the winter months. Costless collars can give a producer additional value in the form of a higher hedge floor due to higher levels of call skew usually found in the winter month contracts.