Week Ending August 23

Fed's Rate Cut Signal Buoys Oil Prices, But Economic Woes and OPEC’s Dilemma Pose Risks

Oil posted a modest weekly loss despite a $3 rally later in the week, with October ’24 WTI closing 71c lower at $74.83/Bbl. Prices found support on Friday after Fed Chair Powell said the US Fed is preparing for rate cuts, contingent on economic data. Lower interest rates could stimulate the economy and increase oil demand. Consequently, the US dollar's decline to its lowest in over a year has made dollar-denominated commodities cheaper for foreign buyers.

Oil, however, has given up its year-to-date gains as concerns about major economies are outweighing OPEC+’s supply cuts. Weaker crude demand from China and concerns about its economic strength have pressured oil prices, while uncertainty surrounding the U.S. economy has fueled bearish sentiment. Preliminary BLS data revisions revealed the labor market was weaker than initially thought through 1Q 2024.

Additionally, both WTI and Brent traded higher on Thursday after falling to their lowest levels since January, a decline that Bloomberg attributed to the market being technically oversold.

On the supply side, OPEC and its allies are considering a 0.5 MMBbl/d supply increase next quarter, but market uncertainty remains about whether they will follow through. This decision is important as the cartel, known for its cautious discipline since October 2022, must navigate weaker demand, rising non-OPEC production, and a relatively weak price environment.

Despite downward revisions to demand growth, if implemented, the additional barrels would build inventories, which the IEA already expects to grow even without the curbed OPEC+ output.

AEGIS has shifted its balance 2024 outlook to neutral, expecting further tenors to rise toward prompt prices. OPEC's plan to gradually increase supply could dampen the most bullish scenarios; the cartel is still expected to manage production carefully to support prices and prevent an oversupplied market.      

Natural Gas Prices Finish Just Above $2/MMBtu As Supply Remains Strong

The prompt month Henry Hub contract finished the week lower at $2.02/MMBtu, with Winter ‘24/’25 and Summer ’25 also remaining under pressure. The trend of bullish storage prints reversed this week. The EIA reported a larger-than-expected build in inventories, production levels remained somewhat firm, and weather forecasts appeared unsupportive of gas demand.

Last week, the EIA reported a 6-Bcf withdrawal from storage driven by a massive 27-Bcf draw from South Central inventories; a 35-Bcf build was reported this week. The South Central region surprised analysts again, but in the opposite direction, this week with a net injection of 0-Bcf, as 6-Bcf was injected into non-salt reservoirs and 6-Bcf was withdrawn from salt domes. Volatility in renewables generation may be partially to blame for this variance, while Lower 48 temperatures for the reported week were also below average, cutting into power sector gas demand.

While lower than July levels, gas output remains firmly above 100 Bcf/d, according to data from S&P. Averaging about 101.3 Bcf/d this week, the low prices in the near-term part of the forward curve may be attempting to signal the need for continued supply curtailments. Production remains the primary balancing mechanism for fundamentals as we head toward the end of the summer season, and variations in expected production can lead to very different end-of-season storage estimates. If production remains strong, inventories may start winter near 4 Tcf, while lower production may see inventories start winter at a much lower level, closer to the five-year average.

Support for gas demand and prices may be lacking over the next two weeks as Lower 48 forecasts show average to below-average temperatures. Peak summer weather is likely behind us, and despite the June-August period being the second hottest of all time, it was not enough to materially lift prices.