Week ending December 1, 2023

Can the OPEC+ Production Cuts Flip the Oil Market Into a Deficit in 2024?

January ’24 WTI lost $1.47 this week to finish at $74.07/Bbl. On November 30, OPEC+, led by Saudi Arabia, agreed to a substantial voluntary production cut of just above 2 MMBbl/d for the first quarter of 2024.

Despite the reductions, oil prices fell by around $2/Bbl on Thursday. The price movement reflects the market's skepticism towards the voluntary nature of the production cuts and the overall manner in which OPEC+ communicated its strategy.

Saudi Arabia is extending its 1 MMBbl/d cut, and Russia is deepening its voluntary oil export cuts from 0.3 MMBbl/d to 0.5 MMBbl/d. The combined voluntary cuts for the first quarter of 2024, excluding Saudi and Russia, are about 0.68 MMBbl/d, amounting to over 2 MMBbl/d in total.

The lack of a unified statement from OPEC+ post-meeting and the need for individual member nations to announce their commitments separately have caused market confusion and uncertainty.

Nonetheless, if OPEC+ members adhere to these quotas, these supply reductions could potentially transform the IEA-forecasted 1.3 MMBbl/d oversupply in the first quarter of 2024 into a nearly 0.9 MMBbl/d deficit and keep inventories consistently below the five-year average.

For a detailed background on the OPEC+ meeting and the issues at stake, please refer to our previous article.

January Natural Gas Contract Posts Fourth Consecutive Weekly Loss

The January Henry Hub contract continues to trade lower amid strong production and a lack of material weather-driven demand.  The January contract has sold off more than $1/MMBtu since the first week of November to $2.81. Over the same period, the Summer ’24 strip fell by 57c to $2.87 and is down 10c this week.

This week, the EIA’s weekly storage report was more bearish than the market anticipated, showing a 10 Bcf injection compared to a median expectation of a -8 Bcf withdrawal. According to the Bloomberg survey, 10 Bcf was the top of the surveyed range, with the lowest expectation being -17 Bcf. On average, inventories begin to draw down by this time of the year, making this a lackluster start to the winter withdrawal season. This has pushed our end-of-season projection for March higher, to 1.86 Tcf. However, most analysts anticipate a withdrawal of about 100 Bcf next week.

Material weather-driven demand failed to materialize in November, with Lower 48 gas-weighted degree days coming in well below the 10-year average and making November the tenth warmest of the past 20 years. Looking ahead, December looks about as anomalously warm as November ended up being. Commodity Weather Group forecasts December to have 775 heating degree days compared to the 10-year average of 804.

This combination of strong supply, a slow start to the withdrawal season, and weak weather-driven demand has weakened prices significantly in both the near-term months and further out in Summer ’24. AEGIS recommends hedging Summer ’24 with swaps and Winter ‘24/’25 with costless collars. Summer ’25 indicates a small amount of call skew, which may make collars more attractive.