Week Ending January 12

What Does the Escalating Middle East Conflict Mean for Oil Prices?

February ’24 WTI lost $1.13, or 1.6%, this week to finish at $72.68/Bbl. Prompt-month WTI prices rose above $75/Bbl for the first time in two weeks amid renewed geopolitical tensions. Fears that the conflict in the Middle East could spread after the US and UK launched airstrikes on Houthi rebels in Yemen added the geopolitical risk and not the premium back into the market.

In an effort to deter further attacks on ships in the Red Sea, the US and UK launched about 70 air strikes on Houthi targets in Yemen on Thursday. Despite this, the Iran-backed Houthis vowed an immediate retaliation.

Earlier this week, the Houthis carried out their most extensive assault on shipping in the Red Sea to date, despite the presence of a US-led naval force, leading to retaliation from Washington. Additionally, Iran's seizure of a tanker off Oman's coast this week has further escalated tensions.

Additionally, the number of oil tankers diverted from the Red Sea has so far remained relatively small compared to container ship reroutes, with Trafigura estimating that 15-20% of the usual tanker traffic has been rerouted.

Analysts are closely monitoring the situation to see if Iran becomes directly involved in the conflict, as it could threaten the region’s oil supply and raise the possibility of Iran blocking the Strait of Hormuz, a critical chokepoint through which nearly 20% of global crude passes.

However, AEGIS believes that the oil market's response will hinge on if any supply is disrupted and for how long. While the temporary pause or rerouting of Red Sea transits results in delayed deliveries, it doesn't necessarily mean fewer barrels.

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 2024.

February Gas Surges 42c Ahead of Cold Blast

Gas prices climbed sharply for another week, marking the fifth consecutive weekly gain for the February Henry Hub contract. Anticipated cold weather continues to be the driving factor behind the price gain, with this January currently forecast to be the third coldest of the past 20 years. The gas demand-heavy Midwest region is expected to be hit particularly hard, as temperatures in Chicago are forecast to fall as low as -10 °F on Monday, according to Commodity Weather Group. There are also concerns about reduced supply due to freeze-offs in certain producing regions.

Prices were particularly volatile this week, especially in the prompt February contract, as the market grappled with shifting weather forecasts and their implication for gas demand. Early estimates show sizable storage draws for the next two weeks, which should significantly reduce the supply overhang. However, unless colder-than-average temperatures persist throughout February, gas inventories may return to a significant surplus by the end of the withdrawal season. 

Our current estimate of the storage path shows a 1.81 Tcf exit point for this winter and a 3.94 Tcf starting point for next winter, assuming normal weather outside of the next two weeks. These estimates have come down by about 150 Bcf from before the two-week forecast began to show this event. These end-of-season estimates are unlikely to lend support to higher gas prices. Most of the upward price action is concentrated on the February contract, with the Summer ’24 strip higher by only 19c this week to $2.81/MMBtu and Winter ‘24/’25 up just 2c to $3.74/MMBtu.

AEGIS continues to hold a bearish outlook for the entire Bal ’24 strip and has encouraged clients to use this rally to de-risk Summer ’24, and potentially Winter ‘24/’25 as there is some downward risk potential in that strip as well. We believe that the underlying fundamentals remain weak for 2024, and the strength in price may begin to fade without continued colder-than-average weather in the remainder of this winter.