Week Ending October 4

Geopolitical Tensions Trigger Oil’s Biggest Weekly Gain in Almost Two Years

November '24 WTI closed the week $6.20, or 9% higher at $74.38/Bbl. Oil prices posted their biggest weekly gain in 18 months on concerns that Israel may decide to strike Iran's oil infrastructure in retaliation to Tuesday’s missile attack.

Both WTI and Brent rallied more than 5% on Thursday after President Biden said the US was discussing whether to support potential attacks on Iranian energy infrastructure. Prices stayed elevated with strong U.S. jobs data on Friday but later eased when Biden discouraged Israel from attacking Iran’s oil fields and hinted at potential new sanctions on Iran by the U.S. and G7 nations.

The conflict between Israel and Iran, including Iran's proxies in Lebanon, Gaza, and Yemen, has heightened geopolitical risks, raising market concerns about disruptions to Middle East oil supplies.

Analysts estimate a major strike could remove 0.3 to 1.5 MMBbl/d of Iranian oil from the market. There's also worry that Iran might target key routes like the Strait of Hormuz, through which nearly a third of global oil passes.

Meanwhile, the oil options market is signaling expectations for further price gains as the Middle East conflict escalates. Call options, which benefit from rising prices, are now trading at a premium over puts, with bullish Brent call volumes hitting a record high, especially for contracts at $100/Bbl and above.

However, the geopolitical risk premium in oil prices could fade if Israel shows restraint and opts for a proportionate response, as urged by the U.S., which favors de-escalation and wants to avoid being drawn into a war with the presidential election approaching in November.

AEGIS has adjusted its outlook for 2025 from bullish to neutral due to the forecasted oversupply. This shift is based on factors such as low projected demand growth, the IEA's forecast of nearly 1 MMBbl/d in oversupply even if OPEC+ maintains current cuts, and OPEC+’s plan to unwind production cuts to regain market share from non-OPEC producers. As a result, oil inventories are likely to rise, which could weigh on prices.

While we expect 2024 prices to stay near front-month prices, we recommend using swaps in 2025 for maximum protection. Producers holding an alternative view might consider costless collars, but unfavorable put-skew makes these less attractive than swaps.

Natural Gas Heads for First Weekly Loss in Four Weeks

The November NYMEX contract posted a loss of 6c this week to settle at $2.84/MMBtu, its first weekly decline in four weeks. The Winter ‘24/’25 strip was unchanged at $3.28/MMBtu, and the Summer ’25 strip gained 2c to $3.26/MMBtu. The market remains particularly tight, and weather forecasts have remained mostly around the ten-year average. However, flows from the Matterhorn pipeline have started to be recorded, raising questions about supply this winter, which may already rise due to returning curtailed production.

A few weeks ago, it was reported that the new 2.5 Bcf/d Matterhorn pipeline connecting the Permian Basin to the Gulf Coast had begun to ship small volumes of gas. This week, meters on Transco, NGPL, and TETCO began showing volumes entering those pipes from Matterhorn. Volumes remain relatively small, totaling about 600 MMcf/d, but flows should ramp up as the pipeline startup process continues. Depending on how quickly the pipe fills, it could be a bearish risk for this winter with more gas flowing toward the Gulf Coast region. The direct impacts should be improved Waha pricing and weaker Houston Ship Channel pricing, but it also presents a bearish risk for Henry Hub prices.  With Waha prices having traded negative for a large portion of 2024, it would seem to imply that a lot of gas is trapped in West Texas and could be flowing on a pipe once egress opens up.

The EIA reported a 55 Bcf storage injection this week, which further eroded the storage surplus to the five-year average. The surplus now stands at +190 Bcf. Low prices seem to have solved many of the concerns relating to high storage levels seen at the start of summer. With about a month left in the injection season, we estimate winter starting levels in storage of around 3.82 Tcf, slightly lower than last winter.

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.