Week Ending January 3

Crude prices rally to the highest level since October.

The prompt WTI contract finished the week up more than $3 to $74/Bbl, the highest price in several months. Continued draws from US inventories and a move by the Biden administration to limit offshore drilling countered a stronger US dollar and further weakness in China’s economy. This move in price comes after several months of minimal price action.

US inventories have been in focus lately, with the EIA reporting another withdrawal this week. This was the sixth consecutive drop in storage levels, which has put Cushing inventories at a 17-year seasonal low. This follows the trend of declining inventories seen in OECD countries in recent months, with total US inventories now near the bottom of the five-year range.

With only a few weeks remaining in office, the Biden administration is looking to limit offshore drilling and exploration. According to Bloomberg, Biden is preparing to issue a decree to permanently ban new development in some federal offshore waters. This could complicate Donald Trump’s plan to boost US energy production. Energy industry advocates spoke out against the proposed move, saying it would endanger US energy security.

This week’s rally came despite the US dollar's further strengthening and continued weakness in the Chinese economy. The US dollar index rallied to a new high of 109.53 this week, the highest level since October 2022. A stronger dollar usually has a negative impact on commodity pricing. Concerns over China’s economy continued, with the onshore Yuan weakening past a level the Chinese government had defended throughout December. Economic sentiment in China remains poor, with bond yields hitting new lows and the regional equity index sliding.  

AEGIS continues holding a neutral view for 2025 and recommends clients look to hedge aggressively on any strength in the forward curve.

Gas falls after starting the week off strong.

Natural gas for February finished down 27c to $3.38/MMbtu on Friday as the prospect of intense cold weather faded to a more moderate cold in the next few weeks. Despite the slight warmer shift in the forecast, January is expected to drop around 850 Bcf. The estimated weather-aided decline pushes our end-of-season (EOS) estimate down to 1.8 Tcf by April. By late January, gas storage should be under the five-year average for the first time in two years.

The natural gas forward curve has shifted in response to the change in expected inventories. Cal 2025 has improved from a 2024 low of $3.00 in early November to $3.41 as of Friday, January 3. Our estimated winter EOS back in November was about 2.1 Tcf and is now 1.8 Tcf, as mentioned above. In other words, the market is likely to be much less oversupplied as we enter the gas injection season in the spring. The curve improvement wasn’t only for Cal 2025. The 2026 calendar strip is up over 25c to $3.849 since early November. It makes sense that there would be sympathy across parts of the curve as the path to 2026 possibly becomes more bullish as the glut of inventories is worked off. The gas market is very sensitive to where gas stocks sit relative to the five-year average, and even removing a few hundred Bcf can make a material difference in how things unfold. We are in early January, so there is plenty of time left this winter for the weather to be warmer or cooler. So far, below-average temperatures are projected to clean up the surplus to the five-year average in inventories.

We remain bullish in the second half of 2025 and Cal 2026. With the move up in the curve, clients have taken advantage of this bullish lean and the call skew by utilizing more costless collars than usual. While the swap will provide you with a much higher floor, collars for next winter and 2026 are our go-to.