Week Ending December 8, 2023

OPEC Struggles to Revive Oil Prices in a Skeptical Market

January ’24 WTI lost $2.84 this week to finish at $71.23/Bbl. Despite OPEC+’s additional cuts, oil prices posted a seventh straight weekly loss and have been hovering at a five-month low. Market participants remain skeptical about Saudi Arabia and its allies' commitment to cut oil supplies by an additional 0.9 MMBbl/d, announced on Nov. 30.

Oil prices remain pressured by concerns of oversupply, mainly from non-OPEC nations, and doubts about the effectiveness of OPEC+'s deep supply cuts. Despite this, Saudi Arabia and Russia assured this week that the cartel could absolutely extend the cuts beyond 1Q2024, and the promised cuts will fully materialize and prevent inventory increases next quarter.

Furthermore, low open interest and trend-following algorithms further exacerbated oil’s decline, as reported by Bloomberg. Also, within the CFTC’s managed money category, net-long positions in NYMEX WTI fell to the lowest since July (wavering between 1-3 percentile of net-spec), while short positions hit a five-month high, with money managers increasingly taking short positions even before OPEC+ cuts.

However, AEGIS believes that these new output cuts essentially act as a floor for prices. And if OPEC adheres to its commitment, 1Q2024 could see a near 0.9 MMBbl/d deficit.

Despite the general market sentiment being negative in the near-term, 2024’s supply-demand balance indicates a greater chance that prices could realize higher.

January Natural Gas Contract Posts Fifth Consecutive Weekly Loss

Natural gas prices moved lower this week, with the January contract falling for the fifth consecutive week, down 23.3c to $2.58/MMBtu. The balance of the Winter ‘23/’24 strip closed 29c lower at $2.51/MMBtu, while Summer ’24 slid another 20c lower to $2.65/MMBtu. The market remains bearish as high supply levels combine with milder-than-average weather across the Lower 48. A larger than anticipated storage withdrawal was not enough to spur prices higher, and Goldman Sachs lowered their gas price forecast.

This week marked the largest storage draw of the season so far, with the EIA reporting a draw of -117 Bcf, compared to a median estimate of -107 Bcf in the Bloomberg survey. Despite a sizeable withdrawal, prices moved lower immediately following the release. The surplus to the five-year average shrunk from 303 to 234 Bcf. The East region saw the biggest draw of -39 Bcf, leaving regional storage levels only 28 Bcf above the five-year average compared to 51 Bcf last week. Assuming normal weather, our current March end-of-season estimate is at 1.83 Tcf, approximately the same amount of gas that was in storage at the start of Summer ’23.

Goldman Sachs lowered its 1H 2024 forecast for Henry Hub prices, citing high production and a mild winter. The bank reduced its forecast for 1Q 2024 and the Summer ’24 strip from $2.88/MMBtu and $2.85/MMBtu, respectively, to $2.55/MMBtu for both.  Goldman noted uncertainty regarding how power burns and production will respond to price over the next few months, which could lead prices to overshoot their forecast to the downside. Furthermore, increased coal-to-gas switching and a decline in production may be required to prevent storage from reaching overly high levels. While the bank did reduce its forecast, our view on the gas market is actually more bearish for those tenors.

AEGIS continues to view Cal ’24 gas prices as risked to the downside, given the state of oversupply in the market. We view swaps as more attractive in the summer and collars in the winter, given the higher levels of call skew seen in winter contract months. AEGIS has been recommending some clients make adjustments if they have sold calls with a substantially higher strike price than the current market, reach out to your strategist if you are interested in making adjustments.