The oil price selloff appears to have run out of steam with oil prices finding a floor over the past week. Brent crude for June delivery was trading at $82.44 per barrel in Wednesday's intraday session, a sharp decline from $90.10 a month ago while the corresponding WTI contract was trading at $78.17 per barrel down from $85.41 over the timeframe. Demand concerns coupled with softening geopolitical risk premium have been blamed for the pullback, with commodity analysts at Citi warning that oil prices could fall to the 70s range in the third quarter. Meanwhile, the oil futures markets have turned decidedly bearish, with money-managers moving sharply towards the short side in oil.
Unfortunately, oil and gas producers in the U.S. Shale Patch might find themselves in dire straits if Citi's predictions come true thanks to the majority having little or no price protection. Commodity analysts at Standard Chartered have revealed that hedge ratios for 2024 output remain well below long-term averages, at 20.9% for oil and 35.7% for gas, good for 0.8ppt lower y/y for oil and 7.5ppt y/y lower for gas. Hedge ratios for 2025 are even lower at just 5.9% for oil and 22.0% for gas. StanChart has noted that current hedge ratios are just a third of their pre-pandemic peak, when the hedge ratio exceeded 60% in 2018.
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Thankfully, StanChart says that producers with protection have hedged at higher prices compared to previous years, meaning that oil prices would have to fall really low for them to get hurt. According to the analysts, the average swap (on a rolling four-quarters forward basis) in the latest survey has clocked in at $74.40 per barrel, the highest across the 33 quarters of StanChart's sample and over $17/bbl higher than in 2018. The average two-way WTI collar for 2024 output has a floor of $65.58/bbl and a ceiling of $85.67/bbl. StanChart has also revealed that the steepest part of the 2024 put options distribution lies in the $64-67/bbl range for WTI, low enough to avoid potential negative gamma effects at current oil price levels.
Source: Standard Chartered
Whereas demand concerns have emerged as the biggest headwind for oil prices, the major energy agencies have only done minor revisions in demand/supply estimates in recent weeks. The Energy Information Administration (EIA) has revised its 2024 oil demand growth lower by 24 kb/d to 920k b/d and 2025 growth higher by 71 kb/d to 1.471 kb/d while the OPEC Secretariat has left its forecast unchanged at 2.247 mb/d in 2024 and 1.847 mb/d in 2025. Meanwhile, the EIA has revised its forecast for U.S. crude oil supply growth lower by 3 kb/d to 277 kb/d in 2024 and higher by 12 kb/d to 522 kb/d in 2025, the OPEC Secretariat forecast has climbed by 10 kb/d to 300 kb/d in 2024 and but unchanged at 290 kb/d in 2025 while StanChart's forecast stands at 218 kb/d growth in 2024 and 157 kb/d in 2025.
In contrast to oil markets, natural gas markets have turned bullish amid forecasts for hotter weather in parts of the northern hemisphere coupled with mounting concerns over rebuilding fuel inventories for the coming winter. Henry Hub prices have jumped 40.8% over the past 30 days to trade at $2.38/MMBtu while Dutch Title Transfer Facility (TTF) prices are hovering at €30/MWh, a 33% increase from February levels. The temporary hiatus in Europe's inventory injection over the past month has combined with a series of supply outages and maintenance, as well as heightened concerns on the stability of the remaining Russian flows into Europe, have been driving the rally. However, Europe's gas inventories remain high, standing at 75.60 billion cubic meters (bcm) on 12 May according to the latest Gas Infrastructure Europe (GIE) data. That marks a 2.44 bcm Y/Y increase and 17.21 bcm above the five-year average. The surplus relative to the five-year average has also been climbing, breaking a run of 25 consecutive decreases relative to the average. The w/w net injection rate stands at a four-week high of 1.944 bcm but still lags the equivalent period last year (2.259 bcm) and the five-year average (2.589 bcm).
Last week, the EU proposed the first batch of sanctions against Russian LNG. The proposed sanctions would prevent EU countries from re-exporting Russian LNG after receiving it and also ban EU involvement in upcoming LNG projects in Russia.
By Alex Kimani for Oilprice.com
Alex Kimani is a veteran finance writer, investor, engineer and researcher for Safehaven.com. More