Week Ending November 10

Is Oil’s Plunge to a Near Four-Month-Low Overdone?

December ’23 WTI lost $3.34 or 4% this week to finish at $77.17/Bbl. WTI plunged by nearly $12 in the past three weeks amid demand concerns from China, US, and Europe. Meanwhile, the risk of escalation of the Israel-Hamas war has seemingly evaporated, amplifying downward pressure on near-term prices.

Acting as a snowball effect, speculative positioning in oil, including crude and products, options delta, and futures, is approaching its lowest since 2011, according to Andurand Capital’s Pierre Andurand. Additionally, hedge funds, represented in the CFTC as managed money, sold about 400 MMBbl in the last six weeks.

Furthermore, the physical market is showing signs of weakness, partly because of increased exports from some OPEC+ countries and refinery margins falling globally, especially gasoline. Additionally, reports from shipping analytics firm Vortexa indicate that China's destocking by nearly 70 MMBbl during the same period has also contributed to the market's softness.

Moreover, oil analysts have monitored unexpected increases in observed oil inventories in September and October, contrasting with the large withdrawals expected by the market. However, in addition to consistent demand growth, the prevailing tightness in the market remains with the OPEC+ supply cuts, with expectations of extension into 2024.

Given the rapid and substantial decline in the market, it may be a good time to adjust and optimize your portfolio. Your strategist will reach out to discuss tailored adjustments.

Natural Gas Prices fall 47c, Erasing Gains From Last Week as Production Tops 105 Bcf/d

The December natural gas contract finished the week at $3.04/MMBtu, 47c or 13.5% lower than last week. The Summer ’24 strip fell by 43c to settle at $3.20/MMBtu, and the Winter ‘24/’25 strip is off by 23c to $4.16/MMBtu.

While warming weather forecasts also contributed to the fall in gas prices, one of the biggest contributors was likely record levels of production, which started to be seen last weekend. According to data from S&P, Lower 48 gas production averaged 104.91 Bcf/d this week, a new record high. This compares to last week's average of 103.5 Bcf/d. The market may be particularly sensitive to production data, given that higher prices may necessitate a decline in production, which seems exceedingly unlikely given the recent jump in output. This has likely also contributed to the precipitous decline in the Summer ’24 strip, which should be less sensitive to changes in near-term weather forecasts.

While much of the production increase is from seasonal dynamics in Appalachia in which higher levels of demand enable operators to increase output, gas production from the Permian could be rising due to an increase in egress capacity. The 500 MMcf/d expansion of the Whistler pipeline may be entering service based on evidence from pipeline interconnect receipts in the US Gulf Coast, near the Agua Dulce hub. Despite this, the pipeline’s owner, White Water Midstream, has not publicly commented on it. For a deeper look into the dynamics of this, see our latest article.

We continue to view the balance of 2023 and the 2024 Calendar strip as risked to the downside due to continued oversupply before becoming more constructive on price in 2025 and beyond, given the anticipated LNG buildout. AEGIS recommends hedging Summer 2024 with swaps and Winter ‘24/’25 with costless collars.