Week Ending October 18

Oil Logs Biggest Weekly Loss in a Year as US Seeks Gaza Ceasefire, China Demand Worries Linger

November '24 WTI closed $6.34 or 8.5% lower at $69.22/Bbl this week. Some signs of easing risks in the Middle East and ongoing concerns about slowing demand out of China pushed WTI to post its biggest weekly decline in a year.

Israeli forces confirmed the killing of Hamas leader Yahya Sinwar, raising hope for a resolution to the Gaza conflict, which could ease some Middle East tensions and reduce the risk premium on oil prices. However, both Israel and Hamas are signaling reluctance toward a ceasefire as the U.S. pursues a broader diplomatic deal. Meanwhile, market participants are focused on Israel's response to Iran's attack from over two weeks ago.

Any further escalation in the Middle East could support oil prices in the near term as a war premium, but restraint or delayed retaliation could shrink this premium.

Additionally, China's apparent oil demand fell 7% year-over-year in September, while its economy grew by 4.65% in Q3, the slowest in 18 months. Despite Beijing's significant stimulus measures, the market was underwhelmed by their scale, reviving fears that a slowdown in the largest crude importer could be a major headwind for oil prices.

Furthermore, the IEA, in its monthly report, projects global oil demand growth at just under 0.9 MMBbl/d in 2024 and close to 1 MMBbl/d in 2025, much lower than the roughly 2 MMBbl/d growth seen in 2022-2023. China leads this deceleration, contributing only 20% to demand growth in 2024 and 2025, compared to nearly 70% in 2023. Meanwhile, non-OPEC+ supply growth is forecast at around 1.5 MMBbl/d for this year and next, largely driven by the Americas, which account for about 80% of the increase.

With IEA projecting nearly 1 MMBbl/d oversupply and low demand growth in 2025, AEGIS revised its 2025 outlook from bullish to neutral. Potential Middle East disruptions are not part of this base case. In addition to this, OPEC+ may unwind production cuts starting in December to recapture market share, potentially building inventories.

We expect prices to stay close to front-month levels in 2024 and recommend swaps for 2025 to ensure maximum protection. Producers with an alternate market view could consider costless collars, though put-skew can make this strategy less favorable.

Natural Gas Prices Slide, With Summer ’25 Prices Now at Multi-Year Lows.

The prompt month Henry Hub contract lost 37c this week to settle at $2.26/MMBtu, the lowest level since last month. The rest of the curve also sold off, with Winter ‘24/’25 now trading at $2.76/MMBtu, down 26c. Summer ’25 fell 13c to finish the week at $2.98/MMBtu. While this week saw temperatures below average across the Lower 48, above-average forecasts have led to increased selling pressure on gas.

With summer behind us, the market is now focusing on heating demand. Current Lower 48 forecasts show October as the second hottest of the past 20 years, which would lead to weaker gas demand. While October is not an exceptionally high-demand month, the below-average weather forecasts still lead to some price weakness. For example, October Henry Hub cash prices settled at the lowest level since 2010 outside of Covid. Looking forward into November, Commodity Weather Group anticipates temperatures to come in above the 10-year average and as the sixth warmest November of the past 20 years. Expectations of a return to La Nina conditions drive this outlook. While this is still outside the range of two-week weather forecasts, concerns of another mild winter after several consecutive warmer-than-average winters may be weighing on prices for the Winter ‘24/’25 period.

AEGIS has held a bearish outlook on Winter ‘'24/’25 for some time now, but with the recent decline in price, we are looking at taking a more neutral outlook. Last year, Winter ‘23/’24 settled at an average of $2.52/MMBtu, and with Winter ‘24/’25 trading around $2.76/MMBtu, we believe the downside may be limited from this level. Further downside risks could materialize if weather is weaker than average or production growth is particularly strong. On the other hand, continued stagnation in production could lead to higher prices.