Week Ending December 29

Oil Posts First Annual Decline Since 2020

February ’24 WTI lost $1.91 this week to finish at $71.65/Bbl. Oil prices posted a $8.61, or 11% annual decline, despite OPEC+’s production cuts and Israel-Hamas war amid concerns of rising non-OPEC supply and slow demand growth.

Over the summer, oil prices rallied following production cuts by OPEC+. This was further amplified by Saudi Arabia's voluntary cut of 1 MMBbl/d starting in July and Russia's move to limit exports. Although these cuts were extended into early 2024, oil prices peaked in late September as the expected significant supply deficit did not materialize completely.

However, increased production in the U.S., along with higher output from other non-OPEC countries, weighed on prices.

Furthermore, the outbreak of the Israel-Hamas conflict in October raised concerns about supply disruptions in the Middle East, which momentarily supported prices. However, the prices failed to sustain higher for longer amid the easing of geopolitical risk concerns.

In December, prices saw a temporary uptick following attacks on vessels in the Red Sea by Iran-backed Houthi rebels, affecting global trade routes. The US military is working with shipping companies to ensure safe passage through the Red Sea amidst a 50% reduction in shipping in the region due to the attacks.

Considering IEA’s latest forecasts and OPEC+’s commitment to control supply, AEGIS expects, at the very least, a balanced market in 2024, with potential for a bullish outlook, especially if Russia and Saudi Arabia extend their unilateral cuts through the end of the year.

Natural Gas Finishes Out a Weak Year as Oversupply Continues to Impact the Market

The February Henry Hub contract finished the week higher by 2.4c at $2.514, as 2023 ends. Gas prices have had a volatile year, as oversupply and weak weather-driven demand have hit prices. The Cal ’24 strip has fallen by $1.55 since the start of 2023, as 2024 has looked increasingly bearish, given high storage and production levels.

Gas production currently stands at 104.3 Bcf/d according to data from S&P, having risen considerably from 101 Bcf/d in January. This surge in production, which primarily occurred in Q4 of this year, caught many market participants by surprise. Following the decline in price at the start of 2023, which led to reduced activity from many large public producers, most vendors expected production to remain flat or even decline through the remainder of the year. Increased egress from the Permian has allowed for higher associated gas production, and seasonal demand increases in Appalachia have enabled higher egress out of the Northeast. This, combined with what was already an oversupplied market, led to weaker pricing in the 2024 and 2025 calendar strips.

Weather-driven demand could not make up for the oversupply, as last winter was particularly mild, and this current winter has, so far, shaped up to be quite mild as well. A hot August-October period was unable to materially reduce storage balances.

High storage levels have contributed to weaker pricing as well. Storage levels started the Winter ‘23/’24 season elevated to the five-year average at 3.84 Tcf, and our current projection, assuming normal weather, shows a March end-of-season estimate of 1.93 Tcf. Carrying the projection forward through the next injection season shows Winter ‘24/’25 starting with about 4 Tcf of gas in storage. This would imply that 2024 could be as bearish, if not more bearish, than 2023.

AEGIS continues to hold a bearish outlook for the next year before holding a more constructive view on Cal ’25 and Cal ’26 due to incoming LNG export demand. Any potential delay of the next few LNG facilities could pose a risk to this view, however.