Week Ending September 27

Oil Falls on Prospect of Higher Supply

WTI prices slid again this week amid a Saudi scare and potentially recovering Libyan production. The November contract finished Friday at $68.18, down from $71 the previous Friday.

Last week, we painted a shift in our 2025/26 sentiment. The forecasted data and OPEC+’s future strategies suggest that the oil market is likely to be oversupplied in 2025, leading to a more bearish scenario. Therefore, we are shifting our outlook for 2025 and 2026 to neutral from bullish. We still maintain our neutral view on the rest of 2024 as OPEC+ is still holding their voluntary cuts for now and a good amount of crude pessamissm has been captured in the price below $70. Evidence of this pessimistic shift can be found in speculator positioning that put both WTI and Brent near or at the one percentile in net length.

Here are a few points that lead us to our 2025 view shift:

• Projected y-o-y demand growth is low
• Forecasted oversupply by the IEA near 1 MMBbl/d for 2025 (this is with OPEC+ keeping cuts where they are)
• OPEC+ wants to bring back voluntary supply reductions as they are losing market share to non-OPEC producers
• Validity may be low, but Saudi Arabia is determined to start unwinding cuts starting Dec. 1, even if it leads to a “prolonged period” of lower crude prices, according to reporting by the Financial Times
• The idea that OPEC+ would cut more in order to balance the market in 2025 looks to be off the table
• OPEC+ would need to cut 1 MMBbl/d on top of their current reductions to balance 2025 when using IEA projections

In summary, oil inventories are likely to rise. Historically, oil prices typically trade where inventories sit compared to the surplus or deficit to the five-year average. OPEC+ has kept OECD inventories at a fairly consistent deficit to the five-year average. If 2025 is oversupplied, stocks would rise, imputing a lower price.

Turning to hedging. While we think the rest of 2024 could materialize near current front-month prices, we would suggest swap structures in 2025 to provide the most protection. Some producers may want to employ costless collars if they hold an alternative view, but put-skew can make these structures more unattractive than swapping.

Gas Prices Continue to Surge on Tight Supply-Demand Balance

The November contract gained another 19c this week to settle at $2.90/MMBtu, extending last week's gains.  The rest of the curve was lifted as well, with Winter ‘24/’25 climbing 12c to settle at $3.28/MMBtu and Summer ’25 moving 11c higher to $3.24/MMBtu. The market remains particularly tight, which has helped support prices.

By our calculations, the weather-adjusted supply-demand balance remains about 4 Bcf/d undersupplied. This has been the case for several weeks now, which has helped shrink the surplus to the five-year average in storage, resulting in higher winter prices. Our end-of-season estimate for gas storage has continued to move lower, coming in at 3.85 Tcf this week. Smaller storage builds over the past few months have led to this, and with about a month remaining in the injection season, it would seem a likely level for inventories to start winter at.

While this is a significant improvement to what balances looked like a few months ago, normal weather this winter would still result in an end to the withdrawal season of around 1.9 Tcf, which is near the top of the five-year range. This is, however, assuming production rises this winter to higher levels of around 103 Bcf/d compared to current levels closer to 101 Bcf/d.

AEGIS recommends hedging summer months with swaps and winters with costless collars. While a swap may generally provide a higher hedge floor, a collar can allow participation in any upward price movement. Higher levels of call skew in the winter also help make collars an attractive choice for producers.