Week Ending October 11

Oil Posts Second Weekly Gain with the Market Awaiting Israel Strike and China Stimulus

November '24 WTI closed $1.18 or 1.5% higher at $75.56/Bbl this week. Prices have disconnected from fundamentals, rising nearly 11% in October as the market closely watches Israel’s escalating strikes on Hezbollah and weighs its response to Iran’s missile strike. Meanwhile, Iran has warned of severe retaliation against Israel and any Arab states facilitating Israeli attacks, raising concerns of a broader conflict.

AEGIS has revised its 2025 oil market outlook from bullish to neutral, based on fundamentals. Factors like low demand growth and IEA forecast of a 1 MMBbl/d surplus contribute to this view. Any Middle East escalation affecting supplies is not included in our base case. Furthermore, OPEC+ may unwind production cuts to regain market share from non-OPEC producers, which could increase inventories and put downward pressure on prices.

We expect 2024 prices to remain close to front-month prices and recommend using swaps in 2025 for maximum protection. Producers with a different outlook could consider costless collars, but the unfavorable put-skew makes it less attractive.

In response to rising tensions, President Biden has urged Israel to avoid targeting Iran's oil and nuclear facilities, aiming to prevent a wider conflict. Consequently, the U.S. expanded sanctions on Iran’s oil and petrochemical sectors, specifically focusing on ships and entities linked to the “ghost fleet.”

Geopolitical tensions have triggered a shift in speculative activity. Net-long positions in Brent held by CTA’s saw their largest jump since 2018, flipping from the record net-bearish positioning. Concerns about an Iranian blockade of the Strait of Hormuz, a critical route for about 21 MMBbl/d in 2023 (EIA), support prices.

Goldman Sachs forecasts Brent prices could rise to $90 in 2025, potentially reaching the mid-$90s if OPEC does not offset a 2 MMBbl/d supply disruption. However, the risk premium could fade if Israel opts for a restrained response, as urged by the U.S.

Meanwhile, China’s economy remains a drag on oil prices as weak consumption and slower economic growth persist. China announced a new fiscal policy briefing set for Saturday.

Additionally, the U.S. dollar index surged to a two-month high, with swap traders now seeing an 80% probability of a 25-bp Fed rate cut in November, driven by stronger inflation and rising jobless claims, weighing on oil prices.

Natural Gas Settles Lower as Recent Gains Evaporate.

The November Henry Hub contract lost 22c to finish the week at $2.63/MMBtu, while the rest of the curve also came under pressure. The Winter ‘24/’25 strip fell 25c to $3.02/MMBtu, and Summer ’25 settled 15c lower at $3.11/MMBtu. Fundamentally, not much changed that would support such a large move across the curve. It is possible that positioning has become too stretched in recent weeks, and this is a liquidation of shorter-term traders.

CFTC data through Tuesday, October 8, shows a significant decline in speculative positioning. Managed money positioning across the NYMEX Henry Hub complex fell by 14.5k contracts to a multi-week low of -123.5k. Speculative positions have remained net-short for some time but reached a year-to-date high in August. They have since trended lower, and this week's decline was the largest in several months. While data for the remainder of this week past Tuesday will not be released until next Friday, it will likely show another drop in speculative positioning as these traders often follow trends.

On Thursday, the EIA reported an 82-Bcf injection into storage, which led to another reduction in the storage surplus to the five-year average, now at +176 Bcf. On a weather-normal basis, we calculated this week's data point as undersupplied by about -1.9 Bcf/d, a significant reduction from the four-week average of about -4 Bcf/d. With only a few weeks remaining in the injection season, it appears storage is likely to start winter around 3.82 Tcf. While this is higher than the five-year average, it is lower than where last winter started.

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 winter has higher call skew levels, making a costless collar more attractive.