Week Ending February 23

Geo-political risk premium continues to drive prices

The global geo-political risk premium has stayed top of mind as Yemen’s Houthi militants continue attacks on merchant shipping. The NYMEX WTI curve shifted lower the past week as the now prompt April contract fell nearly $2.00/Bbl, and Cal 2027 dropped about 90c to $64.95/Bbl. Nearby timespreads for WTI hit their highest level since October of last year. The first month versus the second month, WTI spread (M1-M2) touched +1.14/Bbl on Feb. 20, before finishing Friday at +0.52/Bbl. A steeper or more backwardated curve is a signal that there is tightness in the market, and this encourages withdrawals from storage.

OPEC and its allies are expected to continue oil supply restrictions into the next quarter as the group tries to avoid an oversupplied market. A decision on whether to extend the roughly 2 MMBbl/d cuts beyond March is expected to come early next month. According to a Bloomberg survey, 14 of 17 traders polled expect the supply curbs to be renewed. AEGIS notes that the global crude market would quickly build inventories without OPEC's support in reducing supply. This sentiment is echoed by the International Energy Agency (IEA) which said last week that the global oil markets are in surplus, and the overhang would expand considerably in the 22-nation OPEC+ cartel were to restore production.

A tie-in to previously mentioned timespreads, Amrita Sen, director of research at Energy Aspects Ltd., told Bloomberg that “the physical markets are telling us that actually, markets have tightened.” She goes on to say, “We do believe that OPEC+ will extend its cuts in some form” and then “the surplus does go away.”

This market requires a certain amount of faith in continued OPEC+ action to be bullish. Our base case includes continued action from OPEC+ and remains bullish on the curve. Given that we think OPEC+ is supporting this market and not cutting supply to increase prices, we don’t expect oil prices to gravitate toward $90-$100 WTI. Of course, events can happen (Geo-Political, for example) that can shock prices higher, but this doesn’t fall into our base case view of the market.

Gas finishes the week lower for the fourth consecutive week

The March Henry Hub contract fell 2c to $1.59/MMbtu this week after trading as high as $1.79/MMbtu. Prices advanced further down the curve, with the Winter ‘24/’25 strip gaining 10c to $3.30/MMbtu and Summer ’25 up 9c to $3.18/MMbtu. Prices moved sharply higher on Tuesday afternoon following an announcement from Chesapeake that they would be reducing production.

The gas market has been plagued by oversupply in recent months, with market participants looking for signs that producers may begin shutting-in some production due to the weak pricing environment. The first major producer to announce a reduction in output was Chesapeake in their earnings call this week. The company, which will be the largest US gas producer following its merger with Southwestern, said it will continue to run drilling rigs and frac crews to build up an inventory of completed wells but will not be turned in-line to flow the gas. However, this could lead to a large amount of supply waiting to enter the market once prices recover to more economical levels, potentially making 2025.

A material decline in production should balance the market in the near term and lead to a more bullish environment in the future once LNG demand starts to ramp up again.  Even if production falls by only 2-3%, gas storage may start the next winter season at a level closer to the five-year average.

Our outlook for prices in Summer ’24 and Summer ’25 is neutral, while we remain bearish for Winter ‘24/’25. Beyond this period, we hold a more constructive outlook on price. AEGIS recommends hedging summer months with swaps and winter months with costless collars.