Week Ending January 17

Oil settles higher for a fourth week on sanctions and a tighter physical market

WTI finished the week higher by $1.47 at $78.04/Bbl after trading as high as $80 during the week. Prices are now up more than $4 over the past two weeks after breaking out of the range oil was stuck in for several months. Prices advanced as market participants evaluated the potential impacts of stronger US sanctions on Russia. Meanwhile, signs of a tighter near-term market emerged, and Israel and Hamas reached a ceasefire after months of negotiation.

Last week, the US announced a new sanctions package, the most aggressive since the start of the Ukraine-Russia conflict in 2022. This comes at a time when buyers in Asia have become more wary of purchasing sanctioned oil. While China does not recognize unilateral sanctions, individual companies have found them increasingly difficult to navigate. Buyers in China and India reportedly have requested Saudi Aramco for an additional 750 MBbl/d. Indian refiners are rushing to make payments for Russian oil already purchased, while the number of tankers carrying sanctioned crude stranded off the coast of China has swelled. Some estimates show that nearly 2 MMBbl/d of Russian supply could be at risk, potentially supporting oil markets in 2025.

Prompt spreads have widened significantly in the past two weeks, possibly signaling a tighter near-term physical market. The buying pressure in the front of the curve may be due to panicked Asian refiners securing supply. Freight costs have also surged following the addition of over 180 Russian tankers to the sanctions list.

Meanwhile, Israel and Hamas have reached a ceasefire in the Gaza conflict. This should reduce the amount of geopolitical risk premium, which has supported oil prices over the past year. Following the ceasefire, the Houthi militants announced they may stop attacking commercial vessels in the Red Sea.

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

Natural gas falls after trading over $4/MMbtu

Natural gas for February ultimately finished the week lower after a 33-cent drop on Friday, settling at $3.92/MMBtu. Changing weather models contributed to price volatility, occasionally signaling large gains in demand before reversing course the next day. A cold forecast for the next two weeks pushed the prompt gas contract to $4.258 at settlement on Thursday, but some model capitulation drove prices lower on Friday.

Further along the curve, the Cal 2025 strip briefly surpassed $4.00/MMBtu before settling at $3.855 on Friday. The significant upward shift in the gas curve over the past month or two has been almost entirely driven by January weather. This January is expected to be the third coldest of the 2000s in terms of gas-weighted heating degree days. Over the next three weeks, inventory draws are projected to total approximately 720 Bcf, following the substantial 258 Bcf draw reported on Thursday. The gas curve has repriced higher due to this anomalous cold, which has removed hundreds of Bcf from storage that would have otherwise remained with “normal” January weather.

Closer to the present, weekend cash prices for Henry hub were trading at $10/MMbtu as artic cold dips deep into the south early next week. For folks in Houston, snowmageddon is coming for you on Monday night. Forecasters are calling for 2”-6” of snow Monday into Tuesday morning in Houston.

Clients have taken advantage of the rising curve, and we have observed soaring trading volumes and increased activity in response to higher prices. AEGIS continues to recommend collars in winter to capture call skew and swaps in summer strips. Assuming February and March demand does not materially fall below the 10-year average, the injection season, beginning in April, should start near the five-year average for inventories.