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What is potentially behind the crude oil slide?
Crude oil futures have taken a tumble across the past week as prices fall away from their recent $70 high. Elsewhere, natural gas is buoyed by increasing US LNG exports.
It was only a couple of weeks ago we were talking about a sustained oil price rally. The $70 Brent figure was a shining oil beacon, signalling that the markets were rebalancing, demand was beginning to kick up, and 2021 might be a good year for oil.
So, what’s happened in the past week?
At the time of writing, WTI has retreated below $60, trading around $59, while Brent is now back at the $62 level amid some heavy unwinding in speculative long positions. Is this due to misplaced strategic thinking from OPEC+? Probably not, as its cuts had been supporting prices throughout the back end of 2020 into 2021.
No, it’s our old friend Covid-19. We all thought vaccines would be the answers to our prayers. But with a less than satisfactory roll–out through Europe, politically motivated supply tussles, and now more questions around the AstraZeneca vaccine’s effectiveness, have all conspired to impact oil demand.
Vaccine uptake coupled with a fresh wave of new Covid-19 cases across Europe has resulted in tighter lockdowns. France and Germany, for example, have announced more restrictions, as has Poland. The UK has also said it has had to slow its own vaccine programme, one of the best in the world, due to vaccine supply pressure.
All of the above does not exactly show a continent putting the virus down for good, and ready to return to normality. In other bad news for oil, travel companies are bracing for another “lost year”, which essentially means no real demand for jet fuel and associated petroleum products.
As well as the European lockdown situation, headwinds are blowing from the Middle East, specifically Iran. Record amounts of Iranian oil has been moved to China in recent months. India’s state refiners are also gearing up for an increase in Iranian oil supply, predicted Joe Biden’s White House to loosen sanctions on Iran. OPEC will likely rebalance its cuts to respond to this.
When looking at US output, the EIA’s last crude inventories report, for the week beginning March 8th, put US refinery capacity utilisation at 76.1%. However, US rig count increased by 9 in the week beginning March 15th, reaching 411 – up 68% from August 2020’s record low. Is this a sign that more US output could be coming soon?
U.S. commercial crude oil inventories increased by 2.4 million barrels from the previous week. At 500.8 million barrels, U.S. crude oil inventories are about 6% above the five-year average for this time of year.
Latest EIA natural gas storage report shows an 11 Bcf drawdown in natural gas inventories for the week ending March 12th, against industry expectation of 17 Bcf.
Why the shortfall? Domestic heating demand is likely falling away on higher temperatures throughout the US, but we may see gains in industrial natural gas demand.
Feed gas for LNG may also help support prices. Volumes reached 11.8 Bcf on March 19th at Sabine Pass and Corpus Christi terminals – a near-record high – as Asian demand for US LNG is particularly high right now.
Is OPEC’s gamble paying off?
Has OPEC’s belief that a $70 oil price will not lead to a US shale oil boom paid off? Elsewhere, changing weather patterns set the tone for natural gas markets going forward.
WTI is trading around $64 this morning, with Brent at the $68 mark. A couple of weeks ago, Brent had breached $70, which, while good on paper, actually caused some shaky knees throughout OPEC.
The cartel’s current mission statement is to support prices through production cuts. The $70 Brent price, however, appeared like a green light for US shale to start bumping up production. If that was the case, with more oil entering the markets, then it’s logical that prices would drop, as demand would not balance with increased supply.
$70 was quite a gamble for OPEC+. Luckily for them, it seems to have paid off. US shale oil producers instead continue to practice capital responsibility, instead of chasing higher production volumes to capitalise on higher prices.
OPEC’s production cut strategy is likely to remain the key support for oil prices going forward. At its meeting last week, the cartel committed to keeping its production cuts static. Saudi Arabia also confirmed it would be keeping its voluntary 1m bpd cut in place too.
US shale firms with no production outside America are forecast to raise production modestly in h2 2021, according to Bloomberg Intelligence Data, with levels rising from 6.5m bpd in 2020 to 7.2m bpd in 2021.
JPMorgan expects U.S. oil output to average 11.36 million barrels per day this year compared to 11.32 million bpd in 2020.
For the US market, it looks like gasoline is the key focus for the rest of the year. RBC Capital said fundamentals for summer gasoline are “almost bullish”. Stocks dropped at last EIA report printing for week commencing March 5th, 2021. Motor gasoline inventories decreased by 11.9 million barrels and were about 6% below the five-year average for this time of year.
A $4 per gallon gasoline price may be coming to the US by the summer. A supply squeeze coupled against higher demand, as lockdown eases thanks to US vaccine rollout, which could cause gasoline prices to accelerate.
Total US commercial crude oil inventories increased by 13.8 million barrels from the previous week, according to latest EIA data. At 498.4 million barrels, U.S. crude oil inventories were about 6% above the five–year average for this time of year.
Natural gas trading
Cold weather systems are making their way through the central US states right now and could start hitting the Northeast very soon. But natural gas traders live in a world a fortnight ahead of everyone else, and the forecasts suggest warmer temps will blunt current weather’s impact. We could be seeing lower demand in key states as a result, leading to a bearish EIA storage report.
Latest printing showed a 52 Bcf drawdown with stocks ending the period at 1,793 Bcf, compared with the year-earlier of 2,050 Bcf and the five-year average of 1,934 Bcf. Stocks are likely lower due to the recent frigid temperatures.
Texas refinery capacity is back after a big thaw following the historic big freeze. Higher output is likely, but what is also likely is lower heating gas demand throughout the Southern US. The freak snowstorm that submerged the Lone Star State is probably not going to rear its frostbitten head any time soon. However, lower demand here could coalesce with warmer temperatures in the north to crystallise into lower natural gas prices.
How will oil react to OPEC+’s March meeting?
OPEC and its allies meet later this week with the eyes of the oil market upon them. How will markets react? Will we see production cuts lifted or will they remain in place? Meanwhile, as the big thaw spreads through the US, natural gas prices may fall.
OPEC+’s March meeting dominates the oil headlines this week. The cartel and its allies meet on Thursday to plot the next plan of action, or inaction, going forward as cracks of light appear through the Covid fog.
The big question is: will production cuts be eased? There are mixed outlooks here. Russia is pushing for an easing of cuts and wants to start pumping more again. Saudi Arabia, the de facto OPEC leader, does not want to move quite so quickly.
Compliance with cuts has been solid across 2021 so far, with compliance standing at 103% in January and 121% in February. The latest production survey shows the cartel’s 13 members produced 24.89m bpd in February. This was a decrease of 870,000 bpd from January’s levels, and the first monthly decline since June 2020.
Saudi Arabia’s voluntary 1 million bpd production cut has certainly helped with compliance, but it’s probably going to reduce or remove this entirely in the next meeting, according to some forecasts.
Still, the longer-term outlook across the year has some observers feeling bullish. Goldman Sachs, for instance, has said Brent will hit $75 this year. Lockdowns are starting to loosen, and vaccines are reducing cases and hospitalisations the world over – good news for oil producers.
For a more detailed look at oil ahead of the OPEC meeting, please see Chief Markets Analyst Neil Wilson’s OPEC preview.
Prices may have strengthened thanks to the Texas freeze. For much of the previous two weeks, the heart of the US oil & gas industry has been blanketed by heavy snowfall and ice, shutting down production and refinery operations. Resulting tighter supplies could have added support to oil prices in the short term.
In terms of inventories, US stockpiles appear to be realigning with pre-pandemic norms. They currently sit at the five-year average for this time of year, with last EIA report showing 463m barrels in storage.
US natural gas inventories dropped 338 Bcf, to 1,943 Bcf for the week-ended February 19, according to EIA’s latest report. That’s only the second time inventories have experienced a drawdown over 300 Bcf.
However, a thawing in the Texas Arctic freeze, and warming temperatures across the rest of the US, will likely result in less gas demand, thus lower prices in the coming weeks. March will likely need to give a helping hand, weather-wise, to markets if they wish to sustain the price levels seen at the tail end of February.
Looking to the short-term, though, NatGasWeather said a bump in US national demand was expected to continue through Tuesday, “As a weather system impacts Texas and the southern Plains with showers, while a colder system sweeps across the Great Lakes, Ohio Valley and Northeast with lows of 0s to 30s.” Reasons to be cheerful?
OPEC+ meeting preview: tight supply likely to continue
- Backwardation points to supply deficit
- Inventories falling globally
- OPEC and allies likely to raise output
Crude oil futures rallied in the Asian session before paring gains as the European session progressed as traders look ahead to the OPEC+ meeting this week. OPEC and allies meet on March 4th with market participants looking at a likely lower of output constraints.
Going into the meeting, we note that global inventories are falling at their fastest rate in two decades, according to analysis by Morgan Stanley. Clearly with the ongoing demand uncertainty there is a risk that OPEC overtightens by maintaining output curbs for too long. The risk is now one of keeping too much oil on the side lines and not pumping enough, which will drive prices sharply higher. Goldman Sachs says Brent will hit $75 this year, whilst Trafigura is very bullish.
OPEC’s 13 members pumped 24.89m bpd in February, according to the latest survey, down 870,000 bpd from January in the first monthly decline since June 2020. In February the largest supply cut came from Saudi Arabia, which pledged an additional, voluntary 1 million bpd production cut for February and March. As a result, compliance with pledged cuts stood at 121% in February, up from 103% in January.
Current output constraints stand at a little over 7m barrels per day, with the 23-country OPEC+ grouping likely to agree to reduce this by another 500,000 bpd from April on Thursday. In addition, it’s likely Saudi Arabia will confirm the additional 1m it removed from the market will return in April. This would bring an additional 1.5m bpd on stream, but even this may not be enough to satisfy demand.
OPEC will be mindful of the IEA report that suggested that inventories could start to climb again in the second quarter due to seasonal factors before drawing down again in the second half of the year. “The rebalancing of the oil market remains fragile in the early part of 2021 as measures to contain the spread of Covid-19, with its more contagious variants, weigh heavily on the near-term recovery in global oil demand,” the IEA’s latest Oil Market Report said. “But fresh support has been provided by a more positive economic outlook for the second half of the year, along with a pledge from OPEC+ to hasten the drawdown of surplus oil inventories.”
The spread on Brent futures contracts points to significant short-term supply shortage. Six-month spreads are above $3, while the December contract trades about $4 below the May contract as the front months are commanding a significant premium over back months, a situation known as backwardation. This implies bullish positioning and tight supplies.
And we are seeing similar levels of backwardation here on WTI futures, with the Apr contract trading about $4 above Dec.
OPEC should be mindful of US shale producers, albeit the conditions for a sharp recovery in output are not what they once were. Nevertheless, OPEC+ could – by keeping output too tight – create conditions for a sharp acceleration in prices that see rivals deliver more. Baker Hughes said oil and gas producers added rigs for a 7th straight month for the first time since May 2018, although the rate of growth slowed as the Texas deep freeze hit. The less OPEC does to return the production cut last year the quicker these numbers should rise.
Chart: Pretty close to the top of the BB range and the upwards channel we’ve been in since Nov. MACD bearish crossover to be watched.
Oil prices strengthen as supplies tighten while natural gas heats up in intense cold
Cold sweeping through the US has been good for natural gas, whilst it’s also put a support under oil prices. But OPEC faces some tough talks when it meets next month.
Prices are stronger again, with WTI and Brent trading above $62 and $64 at the time of writing. It appears the tightening of supply, caused by a big freeze hitting much of the US Texas-based refinery infrastructure, has put a tightening on supply. Is this behind the latest price strengthening?
There are also some indicators that demand may be picking up again in the US. The EIA reported a 7.9m barrel drawdown during the week of its last report. At 461.8 million barrels, US crude oil stocks are now at their five-year average for this time of year, which suggests the US oil market may be beginning to realign and show some semblance of normality.
Recovery is still likely to be slow. But there are hopes, globally, that oil-heavy sectors will kick on soon. The UK just released its roadmap for navigating out of lockdown. It’s optimistic all social restrictions could be lifted by June, so airline stocks rallied a little on the news. Could that transfer into higher UK oil demand? Will other European countries follow suit? It depends if they can get their vaccination programmes in order.
There’s also the incoming $1.9 trillion in US stimulus coming that we’ve touched on before.
While stronger prices should be great news for OPEC and allies, there’s a split emerging once again as the cartel having to decide to keep production cuts flat or taper them in April.
Saudi Arabia, OPEC’s top producer and de facto leader, is favouring keep production cuts as they are. As it stands, OPEC has removed 7m barrels per day from daily output across its members, equating to about 7% of worldwide supply. Saudi Arabia voluntarily cut its own production further by 1m barrels.
But then there is Russia. Last week, former Russian Energy Minister and current Deputy Prime Minister Alexander Novak said the oil market had “re-balanced” itself. No prizes for guessing which direction Russia wants production cuts to take going forward.
Saudi Arabia had previously announced it will remove its own voluntary cuts, separate from the OPEC agreement, in April, but the clash between it and Russia will colour the next OPEC on March 4th.
Natural Gas trading
The freezing temperatures sweeping across the US and down into Texas have lit a fire under natural gas prices. They rose 5% across the last week, as the frigid conditions continued. Much of the US natural gas production capabilities is in Texas and has been shuttered as the state continues to deal with the cold as best it cans. Supply may have tightened as a result.
Inventories decreased 237 Bcf in the last review period, according to the EIA, but still sit above the five-year average of 2,224 Bcf, totalling 2,518 Bcf.
Temperatures are also starting to warm in Central US, which may put limits on both price action and demand. Can prices remain high? Spring is coming, which will possibly put a bit of a dampener on price action going forward.
Can stimulus and cuts prop up oil prices?
Oil prices have strengthened in trading in the past couple of weeks, but is this sustainable? Elsewhere, cold weather in the US keeps natural gas on a bullish footing.
Still, the price movements have injected an undercurrent of optimism into the oil world. According to Russian sources, the market has re-balanced itself.
“We have seen low volatility over the past few months, which means that the market is balanced, and today’s prices undoubtedly reflect this market situation,” Russian Deputy Prime Minister and former Energy Minister Alexander Novak said in a Rossiya 24 interview on Sunday.
Novak’s view is prices will average between $45 and $60 for WTI across 2021.
Other factors are at play whipping up the bullish sentiment in oil circles. Firstly, Biden’s mega $1.9 trillion stimulus package will help drive up oil demand in the world’s largest economy, shored up by the news that Covid-19 cases and hospitalisations are dropping in the US, and vaccine rollout is picking up speed.
According to the EIA, 6.6m barrels left storage facilities in the US during the last reporting period, which means storage levels are about 2% higher than this time last year. So, still above the average, but the gap appears to be slowly shortening.
OPEC production cuts continue to do their role in propping up prices, but the cartel has warned that supply is still outstripping demand, seemingly contradicting Alexander Novak’s comments. It appears the fate of oil markets will remain tied in with the pandemic for the foreseeable future.
Natural gas trading
Natural gas prices have been above $3.00 as cold weather systems remain across key Northern US demand areas. But the tendrils of winter cold stretch further than just the Northeast. Old Man Winter has blown his breath over Southern states with Texas now colder than Alaska.
With such cold spikes comes an increase in residential and commercial heating gas consumption. Commentators forecast “enormous demand” while frigid temperatures remain in place.
US natural gas storge inventories fell by 171 Bcf in the latest statistics published by the EIA, suggesting demand is already high. Will it continue? Again, it’s all down to the weather, and price action is likely to reflect that.
Bitcoin surges on Tesla filing
Bitcoin shot to a record high, clearing $43,000 after Tesla reported in an SEC filing that it has bought $1.5bn worth of the cryptocurrency and said it would begin accepting Bitcoin as a form of payment in the future. This is the kind of backing that can take Bitcoin through $50k.
Once again it highlights the power that Elon Musk has in shaping price action and moving markets. He’s now putting his money (shareholders’) where his mouth is. But given his recent comments – and adding #Bitcoin to his Twitter bio on January 29th – it also raises a real question about possible market manipulation. Musk’s tweeting record is chequered to say the least (‘funding secured’) and he has had his knuckles rapped by the SEC in the past. The filing simply says that the investment policy was updated in January 2021 and ‘thereafter’ the company invested an aggregate $1.5bn in Bitcoin. Timing would appear critical. Tesla also says it may acquire and hold other digital assets. The move will also raise questions for fund managers who may not want to invest in a company with this kind of risk on its balance sheet – we know Bitcoin is very volatile – this is normal FX risk x100. Tesla is now starting to take on big FX risk – this may not worry a lot of investors, but some conservative types might be concerned.
Rumours have clearly been doing the rounds that Musk was in Bitcoin. After the Twitter update on Jan 29th, I noted that the move was cheered by the Bitcoin bulls and it indicated support for the crypto in some form, but it was not clear at that stage if he and/or Tesla was buying in size. Now we know not only is Musk on side, but Tesla is backing on a corporate level – the strategy was approved by the Board and Audit Committee. This comes after moves by PayPal and Square, as well as MicroStrategy, which have pointed to rising corporate support for Bitcoin. Last year PayPal sparked a big rally in Bitcoin after it said it would allow users to buy, sell and hold cryptocurrencies on its platform. Before this, Square added $50m in Bitcoin – some 4,709 coins – to its balance sheet, whilst Microstrategy, a Nasdaq-listed business intelligence company, acquired 21,454 Bitcoins as part of its “capital allocation strategy”. Tesla’s move is the kind of big corporate support that bulls are latching on to. More corporate support = more mainstreaming.
OPEC in Crisis & offshore rebound
Rystad Energy is taking a bearish view of the offshore segment going forward. It expects that, once investment rebounds, fully half of next year’s forecast oil & gas spending will be on offshore production and storage.
Chinese shipyards are bracing for vessel fabrication requests, Rystad reports. A rise in new orders for floating production, storage, and offloading vessels beginning in 2021 is expected.
What does this mean for oil prices? Banks are split on their predictions.
In the short term, however, OPEC appears to be on the cusp of a crisis.
The IMF has predicted a 4.5% economic contraction for the Middle East and Central Asia this quarter. This is bad news, as these regions are the busiest for hydrocarbons in the world, and home to leading OPEC members.
A GDP contraction would keep oil prices between $40-50 per barrel into 2021.
There is also overproduction. Currently, OPEC output is at 7.7m b/pd. OPEC members will be meeting to discuss production cuts in late October 2020. 5.6m b/pd is the goal.
It is hoped that would stabilise prices, but it’s yet to be established if oil demand will rise again soon.
The natural gas outlook is, as ever, tied in with US weather.
Last week’s natural gas report showed inventories rose by less than expected but prices slid into the weekend as they remain tied to weather forecasts and wavering LNG export demand.
An early-season cold snap is sweeping through the Midwest although, from Monday, demand is to slip as temperatures warm up.
US oil begins supply fightback after Hurricane Delta passes through key regions
Hurricane Delta’s impact on US oil output continues.
Much of the US’ on and offshore production and refining capability lies in the hurricane’s path.
Prior to Delta’s landfall on October 8th, 90% of offshore production was closed. 800,000 of 2.4 million b/pd refinery capacity was shuttered too.
The focus is now on reopening such facilities, alongside maritime export hubs along the Texas-Louisiana border.
Slipping European demand for US crude
Even as export ports come back online, they may have to find new final destinations.
While China remains an enthusiastic buyer of US crude, Europe is less enthusiastic.
S&P Global Platts analysis suggests that European consumers are turning away from US-grades, preferring more locally sourced oil.
On October 2nd, US exports had slipped to 2.66 million b/pd, according to the US Energy Information Administration. As well as slowing European demand, falling yields on overseas fields are forecast to provoke further export slippage.
Norwegian & Libyan production blockages overcome
Price concerns have also been raised following on from developments in Norway and Libya.
On the Norwegian front, a successful conclusion of a production-disrupting strike has resulted in the reopening of its largest oil field once again. This brings 8% of Norwegian output back online.
Meanwhile, Libya is pushing ahead at production at Sahara, the nation’s largest oilfield.
Despite this, the current outlook for US oil stocks is bullish, holding at around $40.20 – $40.35 per barrel as of lunchtime October 13th.
US EIA Crude Oil Inventories preview: Oil eases back with OPEC+ in focus today
Oil prices were a tad softer Wednesday having struck 5-month highs in the previous session with traders looking ahead to today’s EIA inventories, which are complicated by the OPEC+ meeting also taking place. Prices remain supported by ongoing optimism about the economic recovery with equity markets striking fresh record highs on Wall Street.
The American Petroleum Institute (API) reported a draw in crude oil inventories of –4.264 million barrels last week, which beat expectations for a fall of –2.67m barrels. Market participants today expect the EIA to show a draw of –2.9m barrels, a smaller drop than last week’s -4.5m.
Today’s inventory figures come on the same day as the OPEC+ Joint Ministerial Monitoring Committee, which is set to reaffirm the 7.7m bpd cuts.
It follows OPEC’s latest monthly report, published last week, which indicated the cartel will continue with production cuts for longer. OPEC lowered its 2020 world oil demand forecast, forecasting a drop of 9.06m bpd compared to a drop of 8.95m bpd in the previous monthly report. But the report also sought to calm fears that OPEC+ will be too quick to ramp up production again. Specifically, OPEC said its H2 2020 outlook points to the need for continued efforts to support the market.