Week Ending February 16

Rising Tensions in the Middle East Propel Oil Prices to a Three-Month High

March ’24 WTI gained $2.35, or 3%, this week to finish at $79.19/Bbl. Oil prices have extended gains from last week to finish at their highest level since November as rising geopolitical tensions in the Middle East countered the weaker IEA demand outlook.

Front-month WTI found support on Friday following reports that Hezbollah chief Hassan Nasrallah said the group will escalate its fight with Israel, heightening risks in the region.

Additionally, Israeli Prime Minister Netanyahu has opted not to participate in the ceasefire talks with Hamas this week, amid worsening tensions with Hezbollah and a firm stance against withdrawing troops from Gaza. Meanwhile, Houthi attacks on Red Sea shipping continue, compelling many merchant vessels to avoid the waterway.

Shifting to fundamentals, the IEA, in its monthly oil report, indicated that the oil market could be in a near 1 MMBbl/d surplus for the rest of 2024, citing global oil demand growing by just 1.2 MMBbl/d in 2024—about half of 2023's growth rate. In contrast, OPEC expects a deficit in global oil markets, with strong demand growth projected at 2.25 MMBbl/d in 2024.

AEGIS is modestly bullish on the curve and expects global inventories to remain at a deficit to the five-year average as OPEC+ started enforcing its additional supply curbs.

Furthermore, OPEC+ is set to meet in early March to decide whether to extend oil output cuts into 2Q 2024, with Saudi Arabia’s energy minister saying they “absolutely” could be prolonged. The cartel pledged close to 0.9 MMBbl/d of production cuts in 1Q ‘24 in addition to Saudi Arabia’s voluntary 1 MMBbl/d cut and Russia’s 0.5 MMBbl/d export curbs.

Natural Gas Prices Continue to Slide Lower Amid a Myriad of Bearish Factors

Weak weather-driven demand, persistently high supply, and a below-expectation storage report kept bearish pressure on gas prices. The prompt contract lost another 24c this week to finish at $1.61/MMBtu, bringing the total decline in price over the past two weeks to 48c.

Earlier in the month, weather forecasts anticipated a cooler shift towards the end of February, which has failed to materialize. Forecasts capitulated and now show this February as the second warmest of the past 20 years. Weak demand this month follows a relatively average January and a warmer-than-normal November-December period. As a result, storage levels have remained consistently elevated to the five-year average and once again moved above the five-year high this week following the weekly EIA storage report.

This week’s EIA storage report showed a withdrawal of -49 Bcf, compared to a median expectation of a -66 Bcf draw, according to the Bloomberg survey, which ranged from a low estimate of -76 Bcf to a high estimate of -57 Bcf. The smaller-than-expected print was driven by a sizeable build in South Central inventories that surprised many.

One of the largest factors impacting gas prices is the high production levels. A decline in production will likely be required to balance gas markets. If production continues to come in above 104 Bcf/d or even grows, inventories will likely continue to swell, further pressuring prices lower. However, if there is a decline in output, it would strengthen the bullish case for Cal ’25 and beyond when LNG demand begins to ramp up again.

AEGIS recommends hedging with swaps in the summer months and costless collars in the winter. Higher levels of call skew, or the relative expensiveness of calls to puts, can provide a higher floor for producers using a collar.