Week Ending June 07

Oil Posts a Weekly Loss As OPEC+ Reiterates That Output Path is Conditional

July ’24 WTI lost $1.46, or 2%, this week to finish at $75.53/Bbl. Oil prices tumbled to the lowest levels since February this week after OPEC+ unexpectedly rolled out a plan to restore some production to the market starting in 4Q 2024. Additionally, the price decline was exacerbated by CTA driven algorithmic selloff, reported Bloomberg. 

On June 2, OPEC+ announced its extension of 3.66 MMBbl/d cuts through December 2025. Additionally, the 2.2 MMBbl/d voluntary cuts from eight member countries will continue into Q3 2024 but will start to be reversed in October at a rate of 0.18 MMBbl/d per month. However, OPEC+ indicated that these monthly production increases could be "paused or reversed subject to market conditions."

Both Brent crude and WTI futures hit their lowest levels in four months after the announcement, as the market anticipates the return of supply beginning in October 2024, risking a surplus next year. However, prices recovered modestly after the Saudi Energy Minister led OPEC ministers on Thursday in reiterating that the production hike can be paused or reversed, depending on whether markets can take it.

AEGIS believes that unless demand grows as OPEC expects (2.3 MMBbl/d in 2024) or exceeds consensus (IEA projects 1.2 MMBbl/d growth in 2024), OPEC couldn't increase supply without lowering prices. If OPEC gradually reverses its voluntary cuts this fall, given current supply-demand dynamics, prices could see weakness. While it is uncertain, it is doubtful the cartel would do this.

Furthermore, OPEC's reiteration and flexibility to adjust indicates they could maintain cuts if adding barrels would weigh on prices. Cuts, both quota and voluntary, are set to last until Q3 at least, as expected. However, OPEC’s open willingness to put barrels back on the market blocks much of the upside potential.

Natural Gas Prices Surge More Than 30c, Settling Just Below $3/MMbtu

The July contract finished the week up 32c to $2.91/MMbtu as production fell and the weather turned more bullish. The Winter ‘24/’25 strip rose by 29c to $3.67, and Summer ’25 climbed by 22c to $3.41/MMbtu.

After rising in May to just above 100 Bcf/d, production has since turned lower, falling back to 98 Bcf/d this week, according to S&P data. Appalachian production levels, which have fallen the most since the start of the year, surged around the end of May but have since stabilized around 34 Bcf/d.  While this is nearly 2 Bcf/d higher than the lowest point of May, output is still down about 1.9 Bcf/d from the start of the year. The potential return of curtailed gas production poses a significant bearish risk to prices for the remainder of the year.

Weather forecasts currently show this June as the third hottest in the past 20 years. With production still lower, once material weather-driven demand arrives, the storage surplus should shrink more rapidly. The surplus to the five-year average has already shrunk considerably over the past few months, falling to 581 Bcf this week, mostly driven by a relatively undersupplied weather-adjusted supply-demand balance. However, if the surplus continues to shrink and prices rise in response, curtailed gas volumes may come back to the market at a much quicker pace.

AEGIS continues to hold a bearish view on Winter ‘24/’25, given the risks involving gas production for the remainder of the year and a high estimate for end-of-season gas inventories. Beyond Summer ’25, which we have a neutral view on, the outlook for gas prices improves. The amount of incoming LNG demand should lead to a sizeable call on gas supply, potentially bolstering prices.