Week Ending December 15

Oil Posts its First Weekly Gain in Eight Weeks

January ’24 WTI gained $0.20 this week to finish at $71.43/Bbl. Dovish commentary from the US Fed, followed by a weak US dollar, supported oil prices this week while the IEA and OPEC presented contrasting forecasts.

In its December monthly report, the IEA reduced its forecast for oil consumption growth in 4Q 2023 by 0.4 MMBbl/d. This slowdown is primarily attributed to weakened economic activity in Western nations and is expected to persist into 2024. As a result, the agency now projects a further deceleration in demand growth rates, estimating an increase of 1.1 MMBbl/d in 2024.

On the supply side, increased production from the US, Brazil, and Guyana is expected to counter the output cuts by OPEC+. However, OPEC's own monthly report maintained a firm oil demand forecast, projecting a growth of 2.25 MMBbl/d in 2024. The cartel attributed the recent oil price weakness to exaggerated demand concerns. Additionally, based on recent announcements from Saudi Arabia and Russia, some analysts now expect OPEC to extend its voluntary cuts beyond 1Q 2024.

Furthermore, a dovish stance by the U.S. Fed signaled by potential pausing interest rate hikes and cuts in borrowing costs, led to a weaker U.S. dollar. This, in turn, makes oil, priced in USD, less expensive for holders of other currencies, potentially supporting demand. Some analysts are penciling in three rate cuts next year, which could stimulate economic growth and may further support demand outlook.

Should OPEC+ adhere to its voluntary cuts, 1Q2024 could see a near 0.7 MMBbl/d deficit. AEGIS believes that these new output cuts could act as a floor for prices. Moreover, if Saudi Arabia and Russia decide to extend their unilateral cuts, this could introduce additional upward risk to the oil market.

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.

Natural Gas Curve Continues to Trade Lower Amid LNG Delays

Natural gas finished the week lower by 9c at $2.49/MMBtu, after falling as low as $2.26/MMBtu intraday. While there was a decent rally in the second half of the week, it was not enough to push gas into positive territory and avoid a sixth consecutive weekly decline in the January contract.

The Cal ’24 strip has been particularly impacted by selling pressure over the past couple of weeks following the updated guidance from ExxonMobil regarding their Golden Pass LNG export facility. There is now concern in the market that the Golden Pass facility, one of the next LNG export plants to enter service, may not start taking feedgas until 2025. Many market participants expected the facility to begin taking gas in the second half of 2024, which would likely have helped tighten the supply-demand balance, which looks oversupplied in 2024.

Another notable LNG development came from Freeport LNG. The company has agreed to pay the US Environmental Protection Agency a fine for violating the Clean Air Act due to the June 2022 explosion at the export plant. While this fine may not be particularly meaningful for the gas market, it may lead other facilities to focus more on maintenance in the future. An increased focus on preventative maintenance could lead to lower average utilization rates, whereas many gas market forecasts assume LNG facilities operating near nameplate capacity.

AEGIS recommends hedging summer-month contracts with swaps and winter contracts with costless collars. A costless collar will allow for upside participation and benefits from higher levels of call skew during the winter. Higher call skew can provide a producer with a higher hedge floor in the collar.