Week Ending December 22

Oil moves higher amid heightened tensions in the Red Sea

Oil continued to make gains this week, with the prompt WTI contract gaining $1.89/Bbl to finish at $73.67. The February contract has rallied by $2.23/Bbl over the past two weeks. Increased concerns over attacks on shipping in the Red Sea contributed to the higher prices, while news of Angola exiting OPEC also impacted the market.

Recent attacks on vessels transiting through the waterway have significantly impacted trade flows through the Red Sea, which sees about 12% of global seaborne crude flows. Yemen’s Houthi rebels have been targeting ships in response to Israel’s invasion of Gaza and have attacked or boarded several vessels so far. This has led BP, Maersk, and other shippers to avoid the region and take a longer journey around Africa. Freight rates have risen considerably, which is exacerbated by existing constraints at the Panama Canal. The US has responded by forming a multinational coalition to protect trade in the Red Sea and is considering strikes against Houthi targets if the attacks continue.

Angola announced its departure from OPEC following disputes over its production quotas this week. The country, which produces a little more than 1 MMBbl/d, has had its OPEC-mandated production quota continually reduced, sparking disagreement between Angola and OPEC’s leadership.

AEGIS continues to hold a bullish view on crude prices in 2024, especially if Russia and Saudi Arabia extend their unilateral cuts through the end of the year.

Gas gains 9c despite weak fundamentals

The January Henry Hub contract posted a 9c gain to settle at $2.55/MMBtu, while the Summer ’24 strip rose 6c to $2.54/MMBtu and the Winter ‘24/’25 strip lost 6c to settle at $3.45/MMBtu. Price action was volatile this week, trading in a 20c range between $2.40/MMBtu and $2.60/MMBtu as weather model runs came out.

Fundamentals have remained bearish, with production averaging 105.52 Bcf/d and weather-driven demand still weak. The EIA’s most recent storage print has put gas inventories at the top of the five-year range and 280 Bcf above the five-year average. While weather forecasts show temperatures cooling down from current levels, they don’t currently forecast anything significantly colder than the ten-year average.

AEGIS holds a bearish view on Henry Hub prices for Cal ’24 and a more positive outlook on Cal ’25 and Cal ’26. Persistent oversupply and high storage levels should keep downward pressure on prices until LNG demand begins to ramp up in 2025. The recent delays to the next inbound LNG facilities, which were originally believed to start taking gas in 2024, further extend the fundamental bearishness.