Week Ending March 1, 2024

Oil Hits $80 for the First Time Since Early November, Ahead of OPEC+ Decision

April ’24 WTI gained $3.48, or 4.8%, this week to finish at $79.97/Bbl. Prompt month WTI traded as high as $80.83 on Friday, with Bloomberg noting an acceleration in technical buying as it crossed the $80 threshold. In addition to escalating Middle East tensions, oil prices also found support this week as prompt spreads for both WTI and Brent continued rising, indicating a tightening physical market.

WTI prompt spread (M1-M2) reached +0.86/Bbl on March 1, the highest since September. This backwardated curve suggests tightening supplies, and it encourages withdrawals from storage.

Furthermore, OPEC+ is expected to extend its oil supply cuts into the next quarter to prevent a market oversupply. A decision on prolonging the nearly 2 MMBbl/d curbs beyond March is due next week. AEGIS notes that without the extension of OPEC+ cuts, global crude inventories could grow faster.

On the geopolitical front, tensions, including the Israel-Hamas conflict and Houthi attacks on merchant shipping in the Red Sea, have contributed to the geopolitical risk premium. However, efforts to negotiate a cease-fire in the Israel-Hamas war face challenges after a violent outbreak at the Gaza food aid site on Feb 29.

AEGIS maintains a bullish outlook on the curve, predicated on ongoing efforts by OPEC+ to support the market. However, any geopolitical surprises could shock the prices higher in the near-term, though such a scenarios are not included our base case.

Natural Gas Prices Post Second Consecutive Weekly Gain

The April Henry Hub contract rallied again this week, settling at $1.835/MMBtu as the market looks toward the prospect of lower supply. The Winter ‘24/’25 strip closed up 14c to $3.41, and the Summer ’25 strip finished the week up 12c to $3.28/MMBtu. While last week’s rally came after Chesapeake announced they would lower production this year, a sharp drop in supply and a bullish storage print helped push prices up this week.

Pipeline nominations showed a substantial drop in production this week. Still, it is unclear if this was a temporary maintenance-related drop or the start of a more structural decline in gas production resulting from the weak price environment. According to data from S&P, Lower 48 dry gas production fell to an average of 102.53 Bcf/d this week, compared to 103.72 Bcf/d last week and 104.65 Bcf/d in the week ending February 15. As of this morning, gas output moved even lower to 100.89 Bcf/d, but production levels can often be volatile around the beginning of the month. If gas production remained lower around these levels for an extended period, the surplus of gas in storage could be reduced significantly ahead of next winter, as we detail here.

Thursday’s EIA storage report was more bullish than many analysts expected, with a withdrawal of -96 Bcf compared to a median analyst expectation of a -85 Bcf draw, according to the Bloomberg survey. Despite a bigger than anticipated storage draw, inventories remain significantly elevated to the five-year average and the five-year range. As of the latest data point, gas inventories are 498 Bcf above the five-year average and 248 Bcf higher than last year.

Our outlook for Summer ’24 and ’25 remains neutral, while we are bearish on the Winter ‘24/’25 strip. AEGIS recommends hedging summer months with swaps and winter months with costless collars.