Week Ending September 20

Oil Rises From Oversold Conditions

Oil prices increased for the week, settling just shy of $72 on Friday. This marks a $6.75/Bbl recovery from the bottom of the price carnage that started at the beginning of the month.

Multiple factors helped lift WTI off of $65.75/Bbl. First, the market was likely way oversold, given little change in the current fundamentals. Net speculative positioning in Brent crude went negative for the first time on record. The overreaction by momentum and technical trading pushed oil lower than it should have gone. So, the bounce back in crude can partially be explained by the rapid rebound to $72 for WTI.

Second, continued political strife in Libya has removed about 1 MMBbl/d from the global market, helping to support prices. The unplanned outage has been a short-term catalyst for oil prices, and its total impact will depend on the duration of the outage.

Lastly, the Fed. The central bank announced a rate cut on Wednesday, where, heading into the meeting, the market was pricing in a sizable 50 bps rate cut. Among other asset classes, oil prices rallied into the rumor, and many sold the fact or news once the 50 bps cut was confirmed. The pre-rate cut buying was likely why oil dipped Wednesday afternoon once the cut was confirmed. Oil rallied into Friday the 20^th as the market digested current and future rate policy. Surprisingly, the US dollar stayed relatively flat in the days surrounding the announcement. But again, it looks like the dollar movement started in July as the dollar index traded at 104.5 and is now pegged at 100.7 versus a basket of currencies.

This week, we spent more time discussing the volatile price moves, but we are also starting to rethink our outlook on crude oil prices for 2025. Until this point, AEGIS has been neutral at the front of the curve ($75ish) and bullish for the rest of the forward curve. Future months are backwardated, and have believed that forward pricing would realize higher, close to prices near the front of the curve. We will spend more time next walking through our logic as we continue to look at the data, but it is becoming difficult for us to maintain a bullish stance in 2025 as next year looks materially oversupplied.

If you want to discuss this with Market Analytics, your trade rep, or clients, please contact us at research@aegis-hedging.com or your designated trader.

Natural Gas Prices Post Third Weekly Gain on Tight Supply-Demand Balance

The October NYMEX contract advanced 14c to settle at $2.44/MMBtu in the third consecutive week of higher settlement prices. The forward curve also increased, with Winter ‘24/’25 climbing 17c to finish at $3.16/MMBtu and Summer ’25 rising 10c to $3.12/MMBtu. Prices have been supported by a tight supply-demand balance, leading to a continuous shrinkage of the storage surplus.

According to our calculations, the weather-adjusted supply-demand balance is about 4 Bcf/d undersupplied, and it has been for the past few weeks. This is the most undersupplied it has been in over a year, contributing to the rapid shrinking of the storage surplus to the five-year average. By adjusting for the effect of weather, the model can show if storage levels would converge or diverge from the five-year average if temperatures were in line with the 10-year average. For the past several months, the supply-demand balance has skewed toward undersupply, given the decrease in gas supply this year, but has modulated between slight oversupply and about 2 Bcf/d undersupplied. The past several weeks represent the tightest conditions seen thus far.

According to S&P data, production levels are off the highs seen in late July and early August of about 103 Bcf/d, with current levels closer to 101 Bcf/d. This has mainly been driven by swings in Appalachian production. As we approach winter and higher demand months, Appalachian production may rise, as seen in previous years, which could lead to the supply-demand balance moving back towards neutral or less undersupplied levels. If production remains lower, storage may continue moving toward the five-year average and supporting prices.

AEGIS maintains a bearish outlook for Winter ‘'24/’25, a neutral outlook for Summer ’25, and a more positive view on prices into the latter half of the year and beyond. Swaps may be preferable in the summer months, while the winter has higher levels of call skew, which can make a costless collar more attractive.