Week Ending March 8, 2024

Oil Ends Week Lower Amid Concerns of Adequate Supply Despite OPEC+ Cuts

April ’24 WTI loses $1.96, or 2.4%, this week to finish at $78.01/Bbl. Despite signs of a tightening physical market, concerns about non-OPEC supply growth and Chinese demand countered OPEC+ production cuts, rising tensions in the Middle East, and expectations for the Fed’s policy adjustments.

On March 3, OPEC+ extended their 2.2 MMBbl/d production cuts through June, aligning with market expectations amidst increasing non-OPEC supply and uncertain global demand. Saudi Arabia is extending its voluntary 1 MMBbl/d cut, keeping output at 9 MMBbl/d. Additionally, Russia's cut of 0.47 MMBbl/d in Q2 could tighten the Urals supply.

With interest-rate policy seen as a key demand catalyst, Fed Chair Powell signaled in his congressional testimony the possibility of U.S. interest rate cuts later this year, pending clearer signs of inflation moving sustainably towards the 2% target. Following Powell's testimony, the US dollar eased to its lowest level since January, making oil priced in the US dollar less expensive for holders of other currencies. 

On the demand side, trade data from China indicated soft demand, with imports up 3.3% year-over-year to 10.74 MMBbl/d in early 2024 but down from December's 11.39 MMBbl/d amid refinery slowdowns, weak economic indicators, and high inventories.

While geopolitical tensions in the Middle East, including stalled Israel-Hamas cease-fire talks and escalated Red Sea tensions following the first fatal Houthi attack on shipping this week, support oil prices, they haven't led to a significant uptick due to the absence of direct oil supply disruptions

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

Natural Gas Prices Finish Lower as Storage Surplus Expands For Fifth Week

Prices increased throughout the week, trading up to $2/MMBtu before selling off again toward the end of the week. Despite the early-week rally, the April Henry Hub contract lost 2c to settle at $1.805/MMBtu. Weaker production levels to start the week supported prices, but Thursday's EIA storage report showed the surplus to the five-year average increased further, leading to a sharp drop in prices.

According to S&P data, Lower 48 gas production averaged 101.7 Bcf/d this week, a further decline from last week's 102.9 Bcf/d. While most regions saw a decline in output, the most significant drop was from the Northeast, where production fell by about 750 MMcf/d from the prior week. Looking closer into Appalachian production, the biggest decline has been from the southwest Pennsylvania portion of the Marcellus, falling from 7.8 Bcf/d at the start of the year to 7 Bcf/d as of today. Northeast Pennsylvania has also dropped significantly, from 11.3 Bcf/d to 10.6 Bcf/d. A continued decline in production is the primary bullish factor we are monitoring in the market and may be one of the largest drivers of price action, outside of weather, once we get into the summer season.

The storage surplus expanded for the fifth consecutive week, now reaching 551 Bcf above the five-year average. According to the Bloomberg survey, this week's reported draw was 3 Bcf larger than the median estimate. After an initial price spike, selling continued, with the April contract posting an 11c loss on Thursday.

AEGIS recommends hedging summer months with swaps and winter months with costless collars. A collar can benefit from higher call skew in the winter, which allows for a higher floor price on the hedge.