Week Ending June 21

Strengthening Demand & Renewed Geopolitical Risks Propel Oil to Near Two-Month Highs

The August WTI contract finished the week at $80.73/Bbl, up $2.68 from last week. The Cal ’25 strip settled $1.20 higher at $73.94/Bbl, and Cal ’26 closed up $0.74 to $70.13/Bbl.

Oil prices have recovered from the low $70’s in early June to rally more than $6 in the past two weeks before finishing slightly lower on Friday. Signs of rising fuel demand and renewed geopolitical risks supported prices this week, with much of the recovery possibly due to money manager repositioning.

After an oversold selloff following the OPEC+ announcement on June 2, net-long positions in Brent rose to a three-week high and WTI to a two-week high. In the first week of June, speculative traders added 57 MMBbl of bearish bets against Brent futures, the most on record. A week later, they reversed that position by 35 MMBbl, marking the biggest unwind since 2020.

Additionally, this week, some geopolitical risk premium has been priced back into oil prices following Ukrainian drone attacks on four Russian refineries. These refineries account for nearly 5% of Russia's refining capacity, according to Bloomberg estimates. Furthermore, renewed confrontations between Israel and Hezbollah on the Israel-Lebanon border, along with the Houthi's sinking of a bulk carrier in the Red Sea, are escalating geopolitical risks.

Last week also saw a drawdown in all product inventories. Jet fuel demand surged to 1.75 MMBbl/d, the second highest since the pandemic and just 4% below 2019 levels. Gasoline demand, on a four-week average, continues its slow but steady improvement, approaching last summer’s levels. This stronger demand contributed to the first gasoline stock drawdown in over a month.

AEGIS remains bullish on the curve, expecting prices in further out tenors to roll up towards prompt prices. While OPEC’s plan to gradually bring back supply might prevent the most bullish scenarios, the cartel reiterated to support prices and maintain market balance, avoiding an oversupplied oil market.

Natural Gas Prices Fall For a Second Week as Weather Forecasts Moderate

The July Henry Hub contract posted another weekly loss, falling 18c to $2.70/MMbtu. The Winter ‘24/’25 strip settled 11c lower at $3.65/MMbtu, and Summer ’25 finished the week down 6c at $3.39/MMbtu. The July contract is now down nearly 30c since reaching a peak above $3/MMbtu last week. Cooling weather forecasts pressured prices lower as expectations of strong demand moderated slightly.

While June is still expected to be one of the hottest of recent years, weather models continuously gave up CDDs this week. Despite this, with weather still materially warmer than the ten-year average, the surplus to the five-year average should shrink at a quicker pace. The surplus has been reduced each week for several weeks, falling again this week to +561 Bcf, with much of the reduction driven by a tight weather-adjusted supply-demand balance. Strong weather-driven demand combined with a tight S-D balance should help clean up the very high storage levels.

AEGIS remains bearish on Winter 24/’25 pricing, given that we view the probability favoring loose supply-demand conditions for this period. Our current estimate for start-of-winter inventories is 3.89 Tcf, which is about 50 Bcf higher than where Winter 23/’24 started and about 160 Bcf above the five-year average. A lower start to winter would require either a particularly strong showing from weather-driven demand or a further sustained reduction in supply, which would require consistently lower prices. The second half of 2025 appears more favorable for gas prices, with LNG demand ramping up. However, risks remain to this view, namely any further construction delays from the next facilities to enter service.

Swaps are generally recommended for summer, while costless collars are recommended for winter months with favorable call skew. Higher levels of call skew can allow a producer to obtain a higher hedge floor and leave room for some upside participation.