Week Ending April 5

Brent Advances Above $90 Driven by Geopolitical Risks and OPEC+ Cuts

May ’24 WTI gained $3.74, or 4.4%, this week to finish at $86.91/Bbl. Brent breached the $90/Bbl mark for the first time since October, while WTI surpassed $87/Bbl as the fears of a wider conflict in the Middle East involving Iran, along with tight supplies and signs of resilient demand, support oil prices.

In response to an Israeli airstrike on its embassy in Syria on April 2, Iran vowed to retaliate, potentially escalating the Israel-Hamas conflict to directly involve Iran – a situation that could pose a threat to crude supplies in the region. Iran, despite sanctions, remains the third largest crude producer (3.2 MMBbl/d) in the OPEC.

These heightened geopolitical tensions have prompted significant activity in the oil options market. Bullish call options are now trading at a premium to bearish puts, diverging from the usual put skew, reflecting the market's expectation of potential price upticks.

Concurrently, money managers are getting increasingly bullish, now holding their most bullish positions in Brent for over a year and in WTI for the past five months.

Furthermore, on Wednesday, oil ministers from OPEC+  advised continuing with the group's strategy to uphold voluntary production cuts of 2.2 MMBbl/d throughout the second quarter. Those cuts are further compounded by Mexico’s decision to curb close to 0.44 MMBbl/d of oil exports over the next few months.

In an effort to increase crude processing in April, Russia refined an average of 5.3 MMBbl/d in the first week as refinery repairs gained pace, a slight rise of 0.12 MMBbl/d from the previous week. Nonetheless, processing rates are still at their lowest since May 2023, following disruptions from Ukrainian drone attacks that knocked out nearly 0.9 MMBbl/d of refining capacity so far this year.

AEGIS maintains a bullish outlook on the curve, predicated on OPEC+'s ongoing supply cuts, declining crude inventories, and ongoing attacks on Russian refining infrastructure. However, it is important to note that any geopolitical surprises could shock prices higher in the near term.

Gas Prices Rise on Late-Season Cold Snap And Lower Supply

Prompt month natural gas prices posted a gain of 3c to settle at $1.785/MMbtu this week, following a sizable shift in weather forecasts early in the week and continued lower production. Price action further out the curve remained subdued, with the Winter ‘24/’25 strip finishing the week unchanged at $3.35/MMbtu.

While it is too late in the season for weather to materially impact storage balances, a short-lived cold snap in the Midwest and Northeast has boosted demand, and prices have improved slightly in the May contract. This week, Lower 48 population-weighted temperatures were about five degrees below the 10-year average, pushing demand as high as 90 Bcf/d. However, with temperatures steadily climbing from now until summer, this may have been the last sizeable jump in demand before this summer. 

Supply has continued to come in lower, with dry gas production down slightly from last week to 101.08 Bcf/d. Despite gas output being well below year-to-date highs for several weeks now, prices have not responded very much. The market may be attempting to price itself at a level that would keep supply lower for an extended period long enough to shrink the storage surplus by some amount. For a material decline in the storage surplus, which currently stands at 633 Bcf above the five-year average, production will likely need to average 100-101 Bcf for the year. 

AEGIS continues to hold a neutral view on Summer ’24, given the low prices and subsequent supply response from producers. While a further decline in prices is possible in a bearish weather scenario this summer, we believe much of the bearishness has been priced at these levels. However, we still view Winter ‘24/’25 as the risk to the downside due to what will likely be a very high level of storage to start the winter.