Week Ending July 26

Lackluster Chinese Demand and Equities Weakness Drive Oil's Third Weekly Loss

September ’24 WTI extended last week's losses to finish $1.48 lower to $77.16/Bbl this week despite US crude stocks falling and strong expectations that the Fed might start cutting rates in September.

Prices this week were pressured by a broad selloff in equities and concerns over lackluster demand in China, the top consumer.

The latest U.S. economic data revealed a stronger-than-expected GDP growth of 2.8% annualized in 2Q. Meanwhile, the PCE price index, the Fed's preferred inflation measure, rose 2.5% Y-o-Y in June, aligning with market expectations and bolstering speculation of a September rate cut. Lower interest rates would likely stimulate economic activity and oil demand while weakening the U.S. dollar, making crude oil cheaper for foreign buyers.

EIA data this week showed a fourth withdrawal in US crude inventories, now at the lowest since February. Furthermore, WTI prompt-spread (M1-M2), which is at its highest since October indicates tight near-term conditions. Gasoline stocks also saw a bigger-than-expected 5.6 MMBbl drawdown to 227.4 MMBbl as demand rose by 0.67 MMBbl/d, the most since early November. However, China's apparent oil demand fell 8.1% Y-o-Y in June to 13.66 MMBbl/d, driven by weakness in fuel demand.

Meanwhile, OPEC+ is set to host its ministerial meeting on August 1, but analysts expect it is unlikely that the panel will recommend a policy change. AEGIS is still bullish on the oil forward curve but more neutral on the front of the curve, expecting further out tenors to rise toward prompt prices. If price weakness continues due to ongoing demand concerns, there is a chance that the cartel might delay or cancel the gradual withdrawal of voluntary cuts planned from October onwards to support prices and avoid an oversupply.

August 2024 Henry Hub Falls to New All-Time Low Ahead of Expiry

The August Henry Hub contract, which expires on Monday, fell 11c this week to $2.02/MMBtu and is down more than 30c over the past two weeks. As prompt prices have fallen over the past few weeks, the forward curve has also shifted lower. The Cal ’25 strip fell to a year-to-date low of $3.24/MMBtu, and Cal ’26 is at $3.63/MMBtu.

EQT provided additional insight into the future of their supply curtailment during their quarterly earnings call this week. The company originally began curtailing production around the start of the second quarter amid significant declines in gas prices, cutting their output by about 5% compared to Q1. EQT expects to keep about 0.5 Bcf/d curtailed through the year's second half. Despite EQT and other producers cutting output, supply in the Northeast has returned to be roughly in line with year-ago levels. Weak gas prices in the front of the curve may signal to operators that the market could require consistently lower production to remain balanced.

While last month marked the hottest June on record based on Lower 48 CDDs, temperatures in July have been more subdued. Population-weighted average temperatures going back to 2006 show that this month has only been the ninth hottest July. This is still slightly above average at 78.71 °F compared to the ten-year average of 78.17 °F. However, Temperatures are forecast to rise toward the end of the month and into August, which should lend additional support to power sector gas demand.

AEGIS continues to hold a bearish outlook on prices for this upcoming winter and into the first half of 2025. Structural demand increases in 2025 are concentrated in the back half of the year, driven mainly by higher LNG exports and offsetting what could be a sizeable decline in power sector demand caused by renewables.