Week Ending July 12

WTI falls, ending four-week rally

The August WTI contract settled 37c lower this week at $82.79/Bbl after rising sharply over the past four weeks. This selloff came despite positive demand signals and may be partially driven by renewed hopes of a ceasefire between Israel and Hamas.

Oil demand appears to be improving, with inventories drawing down sharply in the US and prompt time spreads strengthening. The EIA reported a draw of 3.44 MMBbls this week, following last week’s storage pull of 12.16 MMBbls. This puts total US crude inventories about 4% below the five-year average. Prompt time spreads, or the premium of the prompt contract over the second-month contract, have continued to rise this week, reaching the highest point since October. Brokerage PVM said this “suggests refinery appetite, the possible bellwether of seasonal growth in the Northern Hemisphere, is on the rise.” Despite these positive signals, prices retreated.

Hopes of a ceasefire in the Middle East rose this week as the White House announced that Israel and Hamas have agreed to a ceasefire framework. A potential ceasefire could weaken crude prices as the risk of a wider regional conflict, which threatens to disrupt crude supplies, has pushed prices higher this year. However, even if a ceasefire between Israel and Hamas is reached, Israel has been relocating troops and military equipment to the border of Lebanon, with some speculating about a potential military action against Hezbollah.

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 in 4Q 2024 might prevent the most bullish scenarios, OPEC reiterated its support for prices and maintaining market balance, avoiding an oversupplied oil market.

August Henry Hub trades near all-time contract lows

Natural gas prices ended Friday at $2.315/MMbtu, down only $.004 for the week. The August ’24 contract finished off the week's lows, but not before trading only 8c away from the contract’s all-time low of $2.21. The August ‘24 contract trading was nearly $3.20 a month ago, but persistently high levels of storage and LNG outages have weighted on the peak summer contract.

We are almost halfway through July, and the weather has performed more for the bull than bears (ex-Hurricane Beryl), with July 1-12 averaging a solid 2°F above the 10-yr average population-weighted. The anomalous July heat follows the second-hottest June on record. It makes you wonder where gas prices would be if the heat didn’t show, as August trades at $2.31.

The market seems unimpressed with the pace of storage injections relative to the five-year average. Said another way, by our current estimates, gas market fundamentals are not tight enough right now to keep storage from ending the summer injection season (Nov) on the high-end – 3.9 Tcf. When we control for weather, the gas market has only averaged only slightly tight relative to the five-year average. The result is gas injections that are still too much for an already bloated national condition. The Winter ’24-’25 strip has really suffered as projected inventories have stayed high. The strip has fallen 60c to $3.28 since early June. AEGIS still flags this coming winter with further downside potential.