Week Ending January 19

Middle East Tensions Add Geopolitical Risk but Not Premium to Oil Prices

February ’24 WTI gained $0.73, or 1.5%, this week to finish at $73.41/Bbl. Oil prices had a week of rangebound trading as the market participants weighed forecasts of a well-supplied market against the growing conflict in the Middle East.

The US and UK's retaliation against Houthi militants for attacks on Red Sea shipping has only escalated the conflict in the Middle East. This week, Iran targeted an alleged Israeli base in Iraq and launched missiles at militants in Pakistan and Syria, prompting Pakistani retaliation.

Consequently, attacks on vessels near the Bab el-Mandeb Strait have increased, leading to a tenfold surge in insurance costs, with some underwriters considering excluding US, UK, and Israeli ships from coverage.

However, AEGIS notes that there hasn't been a supply disruption in the oil market yet. The market's response to potential escalations will hinge on whether there's a supply disruption and its duration.

Meanwhile, OPEC and IEA, in their monthly reports, stuck to their prevailing narratives. IEA expects a surplus of 0.58 MMBbl/d in 2024. The group increased their demand growth estimate for 2024 by 0.2 MMBbl/d while highlighting the 1.5 MMBbl/d supply growth, mostly driven by non-OPEC+ production.

OPEC forecasts global oil demand will surge, exceeding non-OPEC supply growth in the next two years, driven by China's economic growth. Oil demand is expected to increase by 2.25 MMBbl/d in 2024, while non-OPEC supply, mainly from the US and Latin America, will grow by 1.3 MMBbl/d.

If OPEC's forecasts hold, it could support the cartel's control over oil prices, with the call on OPEC crude estimated at 28.49 MMBbl/d in 2024, exceeding its December 2023 output of 26.7 MMBbl/d.

Nevertheless, AEGIS expects, at the very least, a balanced market in 2024, with the potential for a bullish outlook, especially if Russia and Saudi Arabia extend their unilateral cuts through the end of the year.

February Natural Gas Plunges 79c, Erasing Two Weeks of Gains

Following the rally in the February contract over the past two weeks, which led gas prices higher by 71c, prices collapsed this week by nearly 80c to finish the week at $2.54/MMBtu. The Summer ’24 strip fell 58c to $2.53/MMBtu, and Winter ‘24/’25 was off by 27c to $3.54/MMBtu. While last week's rally was driven by the anticipation of frigid temperatures, which hit the US this past weekend, this week's decline resulted from the capitulation of weather forecasts showing the end of January being significantly warmer than average.

On Monday, the average temperature in the Lower 48 fell to 25.6 °F, the lowest average US temperature of the current season and the lowest temperature since December 2022 during winter storm Elliot.  February futures rallied before this event on the expectation that market balances should tighten. Spot prices surged over the weekend, with spot Henry Hub rising to more than $13/MMBtu and some regional hubs trading even higher, such as Chicago Citygate, which reached more than $25/MMBtu. Gas production fell below 95 Bcf/d as freeze-offs hit basins across the country. Early estimates for the storage withdrawal for the week ending January 19 range from around 300-350 Bcf, likely making it one of the top three largest storage draws.

While a large storage draw will reduce the surplus to the five-year average, without further excess weather-driven demand, inventories are still likely to remain significantly elevated to the five-year average. Our current estimate for the end of March stands at 1.97 Tcf, and our November end-of-season is at 3.99 Tcf. This would imply a continuation of the bearish pricing environment in 2024.

AEGIS recommends hedging summer contract months using swaps and winter months with costless collars. While fundamentals are expected to remain loose next winter, producers can gain value from selling call options, making collars an attractive option.