Crude prices move higher for a third week, reaching an eight-week high.
WTI prices gained 76c this week to settle at $81.49/Bbl, which marks the highest weekly settlement since late April. The 2025 Calendar strip posted a 61c gain to finish the week at $74.58/Bbl. The August contract has gained $3.44 over the past two weeks and is up nearly $9 from the lowest point in June. Prices have continued to increase since the selloff following the last OPEC meeting, partially driven by higher geopolitical risk premium despite signs of weakness in physical markets.
After a quiet period, tensions in the Middle East have increased, leading to higher geopolitical risk premium in crude prices. Earlier this year, attacks by Houthi militants in the Red Sea led to higher crude prices and a rerouting of flows away from the key waterway. Attacks decreased for some time following the creation of a multinational naval coalition, but they have ramped up again. Several ships have been hit with missiles over the past few weeks, marking a resurgence of violence in the area and leading to more ships taking longer but safer routes. In other news, Israel has moved military assets away from Gaza and toward the southern border of Lebanon, potentially preempting an invasion or military action against Hezbollah, which is based in southern Lebanon. Tensions in the region have led to concerns about a wider regional conflict that could disrupt crude flows.
Demand from refineries in Asia remains weak, with refinery margins falling and forcing some processors to cut throughput. In addition, large volumes of oil are waiting on the water for buyers to materialize, with 25 MMBbls of Nigerian crude currently idling in the Atlantic Basin. Citi warned this week that due to these signs of weak demand, recent gains in crude could be “fragile.”
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 its support for prices and maintaining market balance, avoiding an oversupplied oil market.
Gas finishes at three-week low amid stubbornly high storage
Natural gas prices continue to slide lower at the prompt August contract, which is $2.61/MMBtu as of Friday, June 28. The August contract reached a recent high of $3.19/MMBtu on June 11 before paring gains. The Winter ’24-’25 strip is much the same, falling 40c to $3.47 over the same period.
Even with Lower 48 production at 100 Bcf/d, down from the peak of 107 Bcf/d to begin the year, our weather-adjusted model shows only a slightly undersupplied gas market on average. Had June not been so anomalously warm, prices would certainly be lower. The issue stems back to storage, where many regions in the US are well above their five-year averages and cannot keep the same pace of injections that we have witnessed. Prices have to continue to stay low to moderate to encourage more gas demand or quell supply.
Gas inventory levels are still 541 Bcf above the five-year average. This amount of surplus nearly ties 2016 to the highest level of stocks for this time of year. For reference, 2016 was the highest in at least 20 yrs. It will be hard for prices to rally until more of the surplus is worked off. There are a few ways this could happen over the next few months. Our forecast shows the surplus to the five-year average, reducing toward 176 Bcf by the end of September, although our end-of-season forecast still pegs storage in the high 3 Tcf’s heading into winter. These assumptions assume 10-year climate normal weather and likely come at the cost of price for the balance of the summer strip. A hotter-than-normal remainder of summer could definitely turbocharge a convergence of excess inventories to the five-year average.
In light of our projections, we remain neutral on the balance of the Summer ’24 strip, bearish on the Winter ’24-’25 strip, and neutral on Cal 2025. Cal 2026 holds a gift for producers as the call-skew is exceptionally high, allowing for attractive costless collar structures that would take advantage of extrinsic call option values.