Week Ending October 27

Oil finishes the week lower at $85.63/Bbl, despite a $2.60/Bbl rally on Friday

The December NYMEX WTI contract gave up $2.47/Bbl to settle at $85.54/Bbl. The 2024 calendar strip fell 74c to $80.31/Bbl, and the Cal ’25 strip lost 3c to finish at $74.99/Bbl. While prices moved lower over the week, as some of the Middle East fear premium evaporated, Friday saw a significant rally following reports that Israel is ramping up ground operations in Gaza.

The market has been particularly sensitive to headlines involving the current Israel-Hamas conflict, leading to increased prompt-month volatility. Efforts to secure the release of more hostages and allow aid into Gaza have resulted in the delay of Israel’s expected ground invasion, but US airstrikes on Iranian-linked targets Thursday night and an intensification of Israeli activity in Gaza led price higher by more than $2/Bbl on Friday.

The market is likely watching out for the chance that the conflict escalates into a wider regional war, which risks disrupting flows from Iran or creating issues for shipping. An easing of US sanctions on Iranian oil is probably less likely now, although the sanctions had little material effect on exports, with nearly all Iranian exports being shipped to China.

If the conflict were to escalate and further involve Iran, that would present a significant risk to oil shipments through the Strait of Hormuz, where about one-fifth of the world's total oil consumption passes. Iran has threatened in the past to block the straight, which is only two miles wide at some points, but has never followed through.

AEGIS continues to hold a bullish view on oil, given the underlying tightness in the market resulting from the OPEC production cuts, and continues to recommend hedging WTI using swaps.

Gas climbs ahead of the coldest start to November in four years.

Prompt-month natural gas (Nov) settled Friday at $3.164, up 27c on the week. Cooler weather shifts helped Nymex rally to its highest level in two weeks. The majority of the upward price action was delegated to the front of the curve as the Summer 2024 and Winter ’24-’25 strip only rose 5.5c and 2c, respectively. Outside of weather, the EIA’s reported gas injection caught market analysts off guard as most were expecting a larger-than-recorded build.

As of Friday, October 27, 2023, weather models show the coldest start to November in four years. The two-week forecast has now reached November 10, and the 1/3 of the month is tracking as the coolest since 2019 and closest to 2018 for the early part of the month, according to CWG. This winter’s first polar vortex dip down deep into the South Central US has created quite a cold swath for the US, and gas prices responded in kind. However, as CWG points out, this does not tell us much about the winter overall. Both 2018 and 2019 flipped to warmer than 30-year normal Decembers’.

Turning to more fundamental insight, the EIA showed a 74 Bcf injection into underground storage for the week ending 10/20. The gas market responded by quickly rallying after the government's AM data release. Most analysts were expecting a larger build in inventories and were surprised to see the printed number. Gas storage now sits at 313 Bcf above last year and a 183 Bcf surplus to the five-year average. With only a few weeks left in the official “injection season”, our end-of-season (EOS) for gas inventories is 3.74 Tcf.

Despite the recent rally in gas prices, which we think is primarily weather-driven, we remain bearish on natural gas prices versus the strip through 2024. If you want to be bullish about this time period, you need to model a decline in supply for 2024 in our minds. Costless collars are still the instrument of choice for the next two winter strips, and swaps ideal for the Summer 2024 strip.