Week Ending March 15

Oil Holds at November Highs as IEA Flips its Forecast to Deficit on OPEC+ Cuts

April ’24 WTI gained $3.03, or 4%, this week to finish at $81.04/Bbl. Oil prices rallied this week to a four-month high following Ukrainian attacks on Russian refineries and the IEA forecasting a sizable undersupply for 2024, taking into account future OPEC+ cuts for the first time.

The March IEA monthly report marks a significant shift in expectations for the global oil market in 2024. The agency projects a deficit of 0.32 MMBbl/d, starkly contrasting its previous forecast of a 0.8 MMBbl/d oversupply and consequent inventory builds.

This adjustment stems from the first-time inclusion of expected OPEC+ production cuts extending through the year's end, a view that diverges from OPEC's announcement of cuts lasting until 2Q 2024. This outlook adjustment, which AEGIS has incorporated into its OECD inventory analysis for some time now, reinforces the basis for a bullish oil market outlook into 2024.

Within the same report, the agency raised its global demand growth forecast by 0.11 MMBbl/d to 1.3 MMBbl/d, citing a robust US outlook and increased ship fuel demand. However, this is still below OPEC's 2.2 MMBbl/d and Vitol's 1.6-1.8 MMBbl/d projections on the backs of petchem usage in China and diesel demand in India.

On the geopolitical front, Ukrainian drones attacked three Russian refineries over the past week, knocking out nearly 12% of Russia's oil processing capacity, elevating geopolitical risks, and countering the typical downward pressure on oil prices from increased crude awaiting processing.

Furthermore, in preparation for summer, US refiners are ramping up production of summer-grade gasoline amid their biggest refinery turnaround since 2019. Capacity reductions peaked at the end of February with 0.95 MMBbl/d offline and are expected to decline to 0.20 MMBbl/d by the end of March (RBN). This shift has increased refinery utilization from 80.6% in mid-February to 86.8%, led to the first drop in crude inventories since January, and supported the 3-2-1 crack spread (refining margin) to a six-month high of $32.40 on Wednesday.

Natural Gas Prices Move Lower Again as Storage Surplus Reaches Eight-Year High

Despite supply coming in lower again this week, natural gas continued to sell off amid a further increase in the storage surplus. The April contract finished the week down 14c to $1.66/MMbtu. The Winter ‘24/’25 strip settled down 9c at $3.38/MMbtu, and the Summer ’25 strip closed down 1c to $3.25/MMbtu.

According to S&P data, production levels remained lower this week, around 101 Bcf/d. However, with prices continuing to sell off, the market may attempt to communicate the need for additional production curtailments. Of the reduced supply, the vast majority has been from Appalachia, with output down about 2 Bcf/d since the start of the year. Most other regions have also seen a decline, although much smaller, and production from the Permian is up about 130 MMcf/d this year. Keeping a sizable amount of production offline through the end of the year may be necessary to prevent inventories from rising to near capacity. According to our calculations, an average production level of 101-102 Bcf/d may be what is required to avoid this.

This week, the EIA reported a net withdrawal of 9 Bcf from underground storage, bringing the surplus to the five-year average of 629 Bcf. This is the highest storage delta since 2016 and shows the precarious situation in gas inventories. Next week, the EIA is expected to report another small withdrawal from storage. Still, with the withdrawal season ending in the next few weeks, inventories look like they will start summer with about 2.3 Tcf in storage, the highest March EOS since 2016.

We continue to hold a neutral outlook on Summer ’24 and Summer ’25 and a bearish view on Winter '24/’25. AEGIS recommends hedging the summer months with swaps and the winter months with costless collars.