Week Ending January 5

Oil Posts a Weekly Gain, Buoyed by Middle East Tensions and Libyan Outage

February ’24 WTI gained $2.16, or 3%, this week to finish at $73.81/Bbl. Oil prices rose in the first week of 2024, recovering from a decline in 2023 amid concerns of weak demand growth and increased production from non-OPEC producers, while OPEC+ cuts production.

Houthi militants attacked another ship in the Red Sea, while Iran sent a warship, escalating tensions with US forces in the key trade route. Meanwhile, Iran suffered two explosions this week. These developments heighten the risk of minor incidents escalating into major conflicts amidst increasing military buildup in the region.

Reflecting on these tensions, UK Defense Secretary Shapps reported that these events led 12 international firms, like BP and Maersk, to halt Red Sea transit, causing a tenfold increase in shipping insurance costs and higher freight rates since early December.

In Libya, protesters have disrupted the oil supply from the Sharara and El-Feel fields, potentially removing about 0.3 MMBbl/d from the market. However, analysts anticipate that this outage will be short-lived.

Additionally, the US economy added 216,000 jobs in December, surpassing economists' median forecast of 175,000. Average hourly wages also increased to 4.1% Y-o-Y, up from 4% in November. However, this print raises a question of whether the Fed will be able to lower interest rates as early as March.

Furthermore, analysts assess whether strong non-OPEC oil supply will continue to weigh on the market in 2024. Increased production from non-OPEC nations has been countering OPEC's attempts to tighten the market. However, OPEC+'s extended production cuts are set to begin this week.

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 Gains Nearly 40c Ahead of Frigid Temperatures

The February Henry Hub contract posted a 38c gain this week, settling at $2.89/MMBtu ahead of a significant shift in weather. This has also led to higher forward pricing, with Summer ’24 gaining 35c to $2.80/MMBtu and Winter ‘24/’25 up 24c to $3.66/MMBtu. The cold weather anticipated to impact the Lower 48 over the next two weeks will likely be the most significant weather-driven demand gain this winter and should lead to outsized inventory draws. However, the underlying supply-demand balance still looks overwhelmingly bearish, which leads us to view this rally in gas as temporary.

A significant mass of cold air is forecast to move through the Pacific Northwest and Rockies regions into the demand-heavy Midwestern US. Basis prices in the Rockies and Western US have posted large gains this week as weather models came out. Regarding outright gas demand, the largest impact will be when temperatures in the Midwest begin to fall. According to Commodity Weather Group, Chicago is expected to reach temperatures ranging from lows of 5 °F to highs around 20 °F in the 10-15 day forecast period.

While this event is likely to be the coldest period of the current winter season so far, the month of January is forecast to be about average in terms of heating degree days, falling in between the ten and 30-year averages. The extremely mild weather seen in November and December likely helped contribute to the large price response, as the bearish sentiment in the market was particularly pervasive, and a perceived change to this was met with buying.

Underlying fundamentals remain weak, though. This week’s EIA storage report placed gas inventories just above the five-year seasonal range. A large storage draw, or series of storage draws, will help reduce the surplus, but a winter storage exit rate significantly above the five-year average is still highly likely. This leads us to view the current rally in gas as temporary and likely to fade if weather normalizes or moderates.

AEGIS recommends hedging with swaps in the summer months and costless collars in the winter. Given the rise in price across the curve, we have suggested some clients utilize this to add additional volumes to Summer ’24 and Winter ‘24/’25.