Week Ending May 31

With Oversupply in Focus, Will OPEC+ Extend its Production Cuts?

July ’24 WTI lost $0.73, or 1%, this week to finish at $76.99/Bbl. Oil prices posted their second straight monthly decline. The price weakness is likely driven by dwindling geopolitical risk premium baked into crude prices since October and the Fed’s hawkish stance.

Meanwhile, signs of a weakening physical oil market and subdued summer demand make it more likely that OPEC+ may extend its existing production cuts into the second half of the year.

OPEC+ is engaged in informal discussions to decide on extending its 2 MMBbl/d of production curbs into 2H 2024, with plans to finalize the decision during Sunday’s meeting. Additionally, according to delegates, maintaining some production cuts into 2025 is also being considered, as reported by Bloomberg and Reuters.

The OPEC+ alliance's production cuts have prevented an oversupply and supported oil prices this year. Currently, OPEC+ is reducing output by 5.86 MMBbl/d. This includes 3.66 MMBbl/d by OPEC+ members set to last until the end of 2024 and 2.2 MMBbl/d of voluntary cuts by some members expiring in June.

On the supply side, WTI midland, a key export grade, has flipped into contango, indicating a surplus as millions of barrels remain unsold, according to traders. This surplus counters OPEC+ as its output cuts, primarily heavy sour crudes, are offset by an excess of lighter sweet crudes from the U.S., North Sea, and Guyana. Meanwhile, according to the IEA, global oil inventories rose by 34.6 MMBbl in March and are expected to rise in April as well.

On the demand side, while U.S. refiners have been processing crude at the highest rate (94%) since December 2019, Asian refiners are reducing operations due to poor refining margins.

Natural Gas Continues to Give Up Gains as Production Rises

Henry Hub prices came off this week, with the June contract falling 3c to $2.49/MMbtu. The Winter ‘24/’25 strip fell further, down 12c to $3.48, and the Summer ’25 strip finished the week down 5c to $3.29/MMbtu. Behind this price decline may be a few factors, including higher production, swollen storage, and higher supply from Canada.

Production decreased sharply in 2024 from 105 Bcf/d in January to a low point of around 97 Bcf/d last month. Many operators curtailed production this year due to the low-price environment, but with front-month prices rallying sharply, it is possible that some are starting to bring some volumes back to the market. Appalachia was responsible for the largest drop in output, falling nearly 3 Bcf/d, but has recently recovered. The recent easing of prices does correlate well with the uptick in production.

While the storage surplus to the five-year average has declined over the past several weeks, from a peak of 669 to the current level of 586, storage is still highly elevated to the five-year range. Assuming normal weather and a continuation of the current supply-demand balance, the surplus may decline further, but inventories are still expected to start winter above 3.9 Tcf.

Imports from Canada, especially to the Midwest, have been well above seasonal norms this year. Gas flows to the Midcontinent region have been elevated to the five-year range, leading to higher supply levels in the Midwest. While the imports did make up for declining flows from the Northeast, with Appalachian production rising again, the Midwest region may be oversupplied. Extremely weak AECO pricing in Canada has supported above-average exports to the US, as cash prices in Canada have fallen below $1/MMBtu as storage and production are very elevated to averages.

AEGIS remains neutral on the balance of Summer ’24 and Summer ’25 while retaining a bearish view for Winter ‘24/’25. US storage still looks like it may start winter elevated to the five-year average, encouraging lower prices and, subsequently, either higher demand or lower supply. Beyond the second half of 2025, fundamentals look much more supportive of prices, given the incoming demand from LNG.