Week Ending August 9

Oil Snaps Four-Straight Weeks of Losses with Eyes on Equities and Geopolitical Risks

Oil futures snapped a streak of four straight weekly losses, finding support from equities rebounding. September ’24 WTI is up more than $5 from this week’s low and more than $3 from last week's close to finish at $76.84/Bbl. The oil market is also bracing for a potential retaliatory strike by Iran and its proxies against Israel.

Headline risks due to geopolitical surprises and macroeconomic concerns could shock prices higher/lower in the near term, but such scenarios are not included in our base case. AEGIS shifted its outlook from bullish to neutral on the balance of 2024, expecting further out tenors to rise toward prompt prices. OPEC’s plan to gradually bring back supply may prevent the most bullish scenarios from playing out. Still, the cartel will likely attempt to support prices and avoid an oversupplied oil market.

Prompt-month WTI fell to a seven-month low on Monday as commodities were pressured in a global financial market selloff driven by the unwinding of the Japanese-yen carry trade, a weak July US jobs report, and other macroeconomic concerns. US equities have since stabilized and rebounded strongly on Tuesday and Thursday, reassuring market participants.   

Meanwhile, the US, Egypt, and Qatar are pushing for new ceasefire talks on August 15, as the region prepares for a potential Iranian attack on Israel. Despite US sanctions, Iran, which is exempt from OPEC output quotas, exports about 1.5 MMBbl/d of oil. Although no oil supplies have been materially disrupted since the Israel-Hamas conflict began on Oct 7, there is a risk to supply if the conflict escalates further.

Prices also found support this week as Libya declared force majeure at its largest oil field, halting 270 MBbl/d of production. Additionally, Ukraine launched a significant border incursion into Russia.

Furthermore, EIA reported a 3.7 MMBbl decline in U.S. crude inventories for the week ending August 2, marking the sixth consecutive week of withdrawals. This brought inventories to their lowest levels since February. Since late June, U.S. crude stocks have fallen by 19 MMBbl as refiners ramped up processing to meet summer gasoline demand. This year’s seasonal depletion in July and August (from June 28 - Aug 2) was the largest since 2019, indicating a tightening of supplies.

Prompt natural gas prices post the largest weekly gain in eight weeks

This week, the September NYMEX contract jumped 19c, back above $2/MMBtu to settle at $2.15/MMBtu. This comes after three consecutive weeks of declining prices and is the largest weekly gain since early June. Winter ‘24/’25 prices strengthened even more, up 22c to $3.24/MMBtu, and Summer ’25 finished 18c higher at $3.19/MMBtu.

Helping to support prices this week has been a sizeable drop in Lower 48 gas production, primarily coming from the Northeast. Gas output peaked around 104 Bcf/d last week but has fallen to 101.4, according to data from S&P. Appalachian production fell from 35 to 33 Bcf/d amid maintenance on TCO and MVP. Production levels should normalize once these outages conclude.

Gas demand may be weaker than average over the next two weeks, as the latest weather models show temperatures below the ten-year average for almost the entirety of the two-week forecast window. This should equate to below-average power sector gas demand and potentially higher storage injections.

AEGIS maintains a bearish outlook on prices this winter due to storage levels trending near the top of the five-year range, which should limit upside potential. This week, we recommended that clients reexamine call strikes on costless collars as there may be an opportunity to roll down existing call strikes. Our bearish view extends through the first half of 2025 before LNG demand growth may begin supporting the market.