Week Ending October 20

Middle East Tensions Stoke Supply Fears in an Already Tight Market

The ongoing conflict between Israel and Hamas is exacerbating geopolitical concerns in the oil market. Nov ’23 WTI, as it expired, gained $1.06/Bbl, or 1.13% this week, finishing at $88.75/Bbl. Furthermore, Putin said last week that despite the Israel-Hamas conflict pushing oil above $100/Bbl, Saudi and Russian supply cuts will persist.

AEGIS maintains a bullish stance on oil prices. Currently, OECD inventories are 106 MMBbl below the five-year average, with projections indicating further drawdowns. The supply cuts by OPEC+ should keep this market tight and reduce inventories.

Meanwhile, on the frontlines of conflict, the US is seeing more drone attacks in Iraq and Syria, while an American destroyer intercepted missiles and drones fired toward Israel by Houthi rebels in Yemen. On Thursday, Israel attacked Hamas in Gaza and Hezbollah in Lebanon, with a potential ground invasion of Gaza on the horizon. The escalation raises concerns of a broader conflict, potentially drawing in Iran and increasing the US military presence in the area.

There’s a risk the U.S. takes a tougher stance on sanctions enforcement, reversing a looser approach that has allowed Iran to increase output by more than 0.5 MMBbl/d this year. Consequently, any disruptions in the Strait of Hormuz or attacks on vessels, export terminals, or infrastructure could amplify the risk to supply.

However, oil prices found some temporary resistance as the US announced easing sanctions on Venezuela for a six-month period. As of September, Venezuela is producing 0.8 MMBbl/d, up from 2022's average of 0.67 MMBbl/d but below the 2.4 MMBbl/d seen before the 2017 sanctions. With relief, analysts estimate a 0.2 MMBbl/d increase in output over an 18-month period.

Considering constrained OPEC+ supply, low inventories, tightening physical market, resilient demand, and geopolitical risk, AEGIS recommends hedging WTI using swaps, given the rally in the WTI curve in recent months.

Natural Gas Prices Extend Losses, Falling Below $3.00/MMbtu

Natural gas prices slid lower for a second week, with the November contract declining by 33.6c this week and 47c over the past two weeks to $2.899/MMbtu. While the Winter ‘23/’24 strip fell by only 5c to $3.286/MMBtu this week, the Summer ’24 strip declined by 26c to $3.252/MMbtu.

Prices moved lower every day this week, but the largest drop occurred on Thursday following a surprisingly bearish inventory report. The EIA’s weekly storage report showed an injection of 97 Bcf into underground storage. This was far higher than market participants anticipated, with the Bloomberg storage survey showing a median expectation of an 81 Bcf build, the storage survey ranging from a low of +76 Bcf to a high of +91 Bcf. This puts the storage surplus at 176 Bcf above the five-year average and 300 Bcf above year-ago levels.

With less than a month to go in the injection season, it seems highly likely that we will start winter with about 3.8 Tcf in storage (our current estimate is 3.82 Tcf). This should prevent any concerns over scarcity or lack of supply, even if winter shapes up to be colder than average. However, with a starting point of about 3.8 Tcf, a milder-than-average winter could lead to a particularly high March end-of-season number, pressuring Summer ’24 prices.

AEGIS continues to recommend hedging winter months with costless collars and summer months with swaps. A costless collar will allow for upside exposure and benefit from higher levels of call skew, while a swap will provide a higher floor price on the hedge.