Week Ending October 25

Oil Posts Weekly Gain as Markets Eye Middle East Risks and U.S. Election

December '24 WTI closed $3.09, or 4.5%, higher at $71.78/Bbl this week. Lingering concerns over the potential for a wider Middle East conflict are helping put a floor under crude prices, while worries over oversupply and the demand outlook limit the upside.

Negotiators from Israel and Hamas are set to meet in Qatar soon to renew ceasefire efforts. However, oil market remains on alert for a potential Israeli retaliatory strike on Iran, as Israel continues strikes in Lebanon. In case of escalation, the U.S. signaled readiness to help defend Saudi Arabia, the largest source of OPEC's spare capacity. Additionally, the New York Times reported Iran has ordered its armed forces to prepare for war, though it aims to avoid conflict.

Oil prices have traded in a range of nearly $4 this week and the heightened tensions led to a surge in options trading, with traders seeking protection against price swings and currently holding a record number of Brent call options.

Markets are also monitoring potential changes to OPEC+ output plans and considering the outlook for the U.S. election, now less than two weeks away.

Meanwhile, facing low margins, China's refiners are making run cuts at a time when they typically ramp up production for winter fuels like diesel and kerosene. Runs at state refiners fell 6.7% in October from the same period in 2023, with over half of the 60 state-owned refiners cutting run rates in October, according to OilChem.

Despite access to cheaper Iranian crude, private teapot refiners, which account for nearly 25% of Chinese refining capacity, are also incurring losses; their operating rates fell to 55% from over 60% earlier in 2024. These cuts highlight a domestic fuel glut exacerbated by weak consumer spending, property market weakness, and rapid EV adoption. Goldman Sachs forecasts modest support in oil demand from China's recent stimulus, expecting a 0.1 MMBbl/d increase that could lift prices by $1-$2/Bbl by late 2025.

However, with the IEA projecting an oversupply of nearly 1 MMBbl/d and low demand growth in 2025, AEGIS has revised its 2025 outlook from bullish to neutral, excluding potential Middle East disruptions. Additionally, OPEC+ may begin unwinding production cuts starting in December to regain market share, potentially leading to inventory builds. We expect prices to remain close to front-month levels in 2024 and recommend using swaps for 2025 to ensure maximum protection.

Natural Gas Surges More Than 7% in First Weekly Gain in Three Weeks

The prompt month NYMEX contract advanced 29c or 7.5% this week to settle at $2.56/MMBtu. The rest of the forward curve gained as well with the Bal Winter ‘24/’25 strip rising 28c to $3.04/MMBtu and Summer ’25 gaining 16c to settle at $3.14/MMBtu. There were few fundamental factors that this rally can be attributed to and is potentially more driven by positioning and sentiment in the market.

This weeks substantial rally came following three weeks of lower pricing and a particularly steep decline in the nearby winter strip. With many market participants likely being short or holding a bearish outlook on near term prices, any potentially supportive news, such as slightly improved weather forecasts, can have an outsized effect on prices. Speculator positioning provided by the CFTC shows traders had increased their net-short position to the highest level in several years. While near-term fundamentals still appear relatively bearish, a marginal cooler shift in weather forecasts may have been the catalyst needed to force a reversal in positioning.

A notable news item this week is that shipping intelligence firm Kpler reported that they do not believe the Plaquemines LNG facility will be shipping any cargoes until January 2025 at the earliest. Plaquemines LNG is one of the next facilities to begin exporting gas and has already begun receiving small volumes of feedgas. Venture Global initially planned to begin operations at the plant in 2024, but that timeline now appears to be in question.

AEGIS holds a neutral outlook on prices through the end of Summer ’25 at which point we believe the market should be more supported by increasing LNG export demand. Swaps may be a more preferable hedging instrument for the summer months while costless collars may be preferred in the winter due to call skew allowing for a higher hedge floor.