Week Ending March 7

WTI prices fall as OPEC+ set to boost supply and tariff uncertainty looms

WTI prices rose on Friday, settling at $67.01/Bbl. Despite this uptick, crude dropped 4% on the week, marking the seventh consecutive weekly decline. The downward momentum came after the Atlanta Fed’s projected a significant contraction in U.S. economic activity, estimating a 2.8% annualized decline in 1Q GDP, a sharp revision from the previous week's estimate of a 2.3% growth rate. This unexpected forecast has raised alarms about a potential economic slowdown, which in turn has led to a decline in equity markets and fluctuations in commodity prices.

Earlier this week, OPEC+ announced its plan to increase production after several delays. This surprised crude traders when they confirmed plans to proceed with production increases in April. The group announced it would restore a total of 2.2 MMBbl/d of production by 2026, starting with 138 MBbl/d in April. The introduction of new barrels into the market suggests that supply-side factors may not provide the price support that many traders had hoped for.

Adding to the market uncertainty, President Trump’s tariffs went into effect earlier this week. These included 25% tariffs on most goods from Mexico and Canada, a 10% tariff on Canadian energy exports such as oil and gas, and a 10% increase on Chinese imports. The move prompted retaliatory actions from Canada and China, while Mexico’s President Sheinbaum also announced plans for similar measures. However, on Thursday, Trump officials temporarily suspended tariffs on goods compliant with the United States-Mexico-Canada Agreement (USMCA). This exemption, set to last until April 2, 2025, caused a brief uptick in oil prices. The mercurial nature of Trump’s tariff implementation and adjustments have contributed to increased market volatility, particularly with fears that a potential trade war with China could further hinder global demand growth.

The uncertainty surrounding tariffs and the potential for a trade war with China have contributed to this week’s sharp drop in prices. Furthermore, with OPEC+ planning to increase supply, and US sanctions on Iran and Russia having limited impact on global supply, there is little reason to expect a significant price rebound. As a result, AEGIS has adopted a neutral stance on oil prices, forecasting limited upside.

Henry Hub continues to push higher as winter fades

The April NYMEX contract advanced sharply this week, trading up to levels not seen since 2022. The prompt contract settled up 30c on the week to $4.30/MMbtu after trading as high as $4.50/MMbtu. While the front of the curve saw the most gains, the Summer ’25 strip was higher by 36c to $4.46/MMbtu, and Winter ‘25/’26 gained 29c to finish the week at $4.92/MMbtu.

The storage deficit expanded to the widest level since 2022, with the EIA reporting a -80 Bcf withdrawal this week. This put US inventories 224 Bcf below the five-year average and 585 Bcf lower than storage this time last year. Withdrawals from now until the end of the season should be more muted as temperatures have warmed up across the US. Our current estimate for the amount of gas left in storage at the end of the withdrawal season is 1.69 Tcf, about 176 Bcf lower than the five-year average. This deficit has helped support gas prices for the next few seasons as there is now less of a supply overhang on the market.

Production moderated somewhat this week, but it may be driven by upstream dynamics relating to the recent freeze-offs. S&P data shows Lower 48 gas output averaging 104.3 Bcf/d this week compared to 106 Bcf/d last week. However, last week's production numbers may have been unusually high due to freeze-offs the prior week. Production freeze-offs can result in a temporary increase in well pressure, resulting in a jump in production, with this week being more of a return to normal. Going forward, high production levels may not be needed in the next few months, but by the start of Winter ‘25/’26, gas output will need to be around 108 Bcf/d to keep the market balanced to year-ago levels, based on our calculations.

AEGIS recommends clients hedge the summer months with swaps, while costless collars may be preferable for the winter months. The recent price rally has also seen volatility and call skew rise, potentially increasing the attractiveness of a costless collar for a producer.