Week Ending July 19

WTI Futures Backwardation Hits Eight-Month High as Cushing Inventories Fall

August ’24 WTI traded within a tight range, ending the week down $2.08 at $80.13/Bbl. For most of July, oil traded within a $5 range amid low volume and volatility. Oil prices came under pressure on Friday after U.S. Secretary of State Blinken hinted at a potential ceasefire between Israel and Hamas.  Amid listless trading this week, three-month implied volatility in WTI fell to its lowest since 2018, while volumes were lower than the 10-day average, according to Bloomberg data.

Still, WTI’s prompt spread (M1-M2) is in backwardation and is at its highest level since November. The spread indicates demand is outweighing supply in the near term. Additionally, inventories at Cushing, OK, fell last week to a three-month low.

However, the U.S. dollar index rose for a second session following stronger-than-expected U.S. labor market and manufacturing data, weighing on dollar-denominated oil.

On the demand side, China's Third Plenum ended this week with little indication that Chinese leadership is planning measures to boost demand or address the property slump.

On the supply side, OPEC+ overproduction against quota narrowed to 0.09 MMBbl/d in June, vs 0.18 MMBbl/d in May, according to data compiled by Bloomberg. Meanwhile, Russia has cut its seaborne crude exports to 3.11 MMBbl/d as of July 14, down nearly 0.6 MMBbl/d from its April peak of 3.6 MMBbl/d, to prioritize domestic refining. This reduction impacts major buyers like India and China. Analysts expect exports to stay around 2.7 MMBbl/d through August and slightly rebound in September after refinery maintenance.

Crude prices are up nearly $9, or 12% this year, supported by OPEC+ production restraint. AEGIS remains bullish on the curve, expecting further out tenors to rise toward prompt prices. While OPEC's plan to bring back some supply in 4Q 2024 may limit the most bullish scenarios, the cartel remains committed to supporting prices and avoiding an oversupply.

Gas Moves Lower Despite Signs of Freeport Restart And a Small Storage Build

The August Henry Hub contract fell 20c to $2.13/MMBtu, reversing gains from last week and falling to an all-time contract low. The weak price action came despite signs that the Freeport LNG export facility is increasing its gas intake and a much smaller-than-expected storage build reported by the EIA.

Freeport LNG cut its feedgas flows to zero before last week’s Hurricane Beryl, with the facility remaining offline through this week. As of this morning’s nominations, Freeport is now taking about 700 MMcf/d, indicating at least one liquefaction train is online. With flows to the facility down, total US LNG feedgas levels have been at or near multi-month lows this week, falling as low as 10.7 Bcf/d on Wednesday. Lower demand from export facilities can sometimes be enough to push the market toward oversupplied conditions, weakening prompt month and spot prices.

The EIA reported a 10 Bcf injection into storage, which was materially smaller than the Bloomberg median estimate of 26 Bcf. This small build was partially driven by South Central withdrawals from salt and non-salt storage facilities. Anomalous heat in Texas and other parts of the South Central can be blamed for the storage withdrawal. On a weather-adjusted basis, we calculate this week's storage print as being about 1 Bcf/d undersupplied relative to the three-year average. While the storage surplus to the five-year average shrank again this week, the low prices may be a sign that the market is attempting to communicate the need for continued lower supply or higher demand to avoid high inventories in advance of winter.

AEGIS maintains a bearish outlook for Winter ‘24/’25, given what looks to be a loose supply-demand picture. The first half of 2025 may be equally weak before higher demand in the second half of the year is expected to clean up market balances.