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Can crude oil prices make it to the triple digits this year?
Oil prices are mounting a strong upward charge as the natural gas crisis rolls on. The question is how far can oil go?
A combination of factors sent oil prices skyward over the weekend. It essentially boils down to the state of inventories, supplies being kept in check, and demand recovering from the summer’s Delta variant COVID-19 wave.
Then you can factor in the global natural gas shortage. A big part of the support crude prices are getting comes from the gas crisis in the form of fuel-switching – or at least the idea of increased fuel switching.
Oil bulls believe that Europe and Asia could pick up more oil for their power demands this winter to compensate for tighter gas supplies. More oil use = more oil demand = oil prices.
“An acceleration in gas-to-oil switching could boost crude oil demand used to generate power this coming northern hemisphere winter,” ANZ commodities analysts said in a note published earlier in the week.
If this does occur, despite Russian President Putin saying he would step in and increase gas supplies to Europe, then fuel switching could be the catalyst that sends oil prices into three-figure territory.
However, JPMorgan analysts have said they’ve yet to see any evidence of a major oil-to-gas fuel change just yet.
A note from the investment bank said: “This means that our estimate of 750,000 barrels per day of gas-to-oil switching demand under normal winter conditions could be significantly overstated.”
So, under present circumstances, the market appears to be pricing in this shift, but it might not actually occur.
Crude prices were on a strong footing at the start of the week. As of Tuesday morning, WTI futures were trading for around $80.5.
Brent crude futures are exchanging hands for $83.83.
There was talk last week that the US would be dipping into its strategic reserve, which did cause prices to wobble. However, the Department of Energy has walked back on these claims. If anything, US inventories are going up.
Oil & gas infrastructure in the Gulf of Mexico, previously closed due to Hurricane Ida passing by, is back online. Rig counts are rising week-on-week. That means more US-sourced crude is being pumped into its domestic stockpiles. As such, there is no need to tap the nation’s strategic reserves just yet.
Crude inventories rose by 2.3 million barrels in the week to October 1st to 420.9 million barrels. Analysts were expecting a 418,000 drawdown.
Natural gas trading
The ongoing gas crisis was creating plenty of upside risk at the start of the week. However, it looks like traders were looking at improving US natural gas supplies for this week’s price action.
Warmer temperatures are playing heavily into the US 15-day weather outlook. Cold temperatures are departing from much of the US, and while unseasonable warmth is good for those who want to go out and about, it’s not so great for price action.
October demand could fall to its lowest for over forty years based on prevailing weather forecasts. It’s possible that the demand picture could extend into November too.
However, warm weather will help the injection situation.
The Energy Information Administration (EIA) reported last Thursday that domestic supplies of natural gas rose by 118 billion cubic feet (Bcf) for the week ended October 1st.
S&P Global Platts analysts were expecting a smaller 111 Bcf rise.
There is some way to go before stockpiles are in line with seasonal norms. Total stocks now stand at 3.288 trillion cubic feet (Tcf), down 532 Bcf from a year ago and 176 Bcf below the five-year average.
In terms of price action, Henry Hub futures were trading at $5.79 on Monday morning and looked like they were ready to challenge $5.80.
Prices pulled back to $5.40 across the Monday session leaving. They dropped further, roughly 2%, to $5.20, so last week’s major rally appears to be petering out. Where they go now seems tied in with US weather patterns. There’s still a gas shortage but as mentioned above, the focus is on what’s happening in the USA instead of Europe and Asia.
Vlad to the rescue? Putin steps in to calm nat gas crisis
Vlad to the rescue… Looks like Putin has just come in to call a (temporary) halt to the gas crisis in Europe, finally stepping in with comments that have offered some stability to the market after a tumultuous morning/week.
- Boosting gas supplies to Europe
- Ready to stabilise global energy market
- Gazprom supplies to Europe to reach new record
- Increasing gas transit via Ukraine & will exceed contractual obligations for gas via Ukraine.
Henry Hub Nat Gas prices were offered on the comments/headlines that Russia is ready to help out. The situation remains difficult of course but could be that Putin has just put a ceiling on these crazy market moves for the time being. There are other factors but a boost in supply from Russia would ease immediate concerns in Europe. Longer-term of course the lack of fossil fuel capex in response to high prices is a big driver of prices staying higher for longer. Winter is coming and supplies are still very short and markets volatile. Plus how long does Putin play nice?
Anyway, it seems to have calmed the market for the time being. One thing you have to take from all this is that Nord Stream 2 is surely going to be approved soon…Merkel stressing in comments just a few minutes ago that it is not yet ready.
Henry Hub prices tumbled off the highs to test $6 again on the news crossing the wires. UK prices have meanwhile completed a heck of a round trip with a daily gain of 40% reduced to 4%. Whilst US nat gas prices are not directly correlated to the situation in Europe we can see that the comments from Putin hit prices as they crossed the wires. Oil was also pulled down on the comments.
Oil surges to seven-year high on OPEC+ decision
OPEC and allies commit to production increases sending prices on a strong upward trajectory.
The week’s big news is the oil price boost afforded by OPEC+’s output increase.
The cartel and its allies met virtually on Monday to discuss the state of play for its production volumes. It unanimously decided to stick with increasing output by 400,000 bpd in line with its tapering plans.
There had been some talk of OPEC+ pushing for an 800,000 bpd increase in November, with no increase to follow in December. That isn’t the case. There is a tricky tightrope to walk for the cartel regarding supply and demand, after all.
Oil jumped on news that more OPEC+ output is coming. WTI, for instance, is trading at seven-year highs with futures at $77.87 and spots at $77.70.
Brent broke above $80 on the news. At the time of writing, Brent crude futures had reached $81.69, gaining 0.48% on the day. Brent spots showed similar on-the-day growth and were trading for $81.47.
On the one hand, OPEC+ has acted to protect prices. Another argument is that there is actually not enough room to grow production further at this stage. While Saudi Arabia and the UAE have increased their export volumes by 1.9m bpd 2021, for instance, other OPEC+ members have actually seen theirs drop.
US President Joe Biden was keen for OPEC+ to expand production even further. Roughly 30m bpd of production has been affected by Hurricane Ida. While the reopening of US shale infrastructure in the Gulf of Mexico is underway, Biden was hoping OPEC+ could plug the gap.
That’s clearly not the case here. Instead, OPEC+ is treading the same cautious path it has been walking for the length of the pandemic.
Baker Hughes reported a rise in rig counts for the fourth consecutive week on Friday. Rigs rose by 7 to 528 in the week ending October 1st – the highest level since April 2020. Many Hurricane Ida-hit facilities are starting to come back online, hence the increase.
Looking to US inventories, we saw a major increase EIA figures in the week ending September 24th. US commercial crude oil inventories increased by 4.6 million barrels from the previous week.
At 418.5 million barrels, US crude oil inventories are about 7% below the five-year average for this time of year.
Natural gas trading
Natural gas dropped on Friday, but as of Monday had started to make strong gains again. At the time of writing, Henry Hub futures were up 4.11%, trading at around $5.77.
The march towards $6.00 is back on.
Supply constraints remain in Europe and the UK and China is apparently hellbent on sucking up every last ounce of LNG it can get its hands on. Even Russia has begun tightening levels heading to Europe. It’s going to be a tricky couple of months in terms of supplies.
Bad for consumers? Most likely. Good for bullish traders? Possibly.
Last week’s EIA storage report triggered a broader sell off with traders feeling bearish.
Working gas in storage was 3,170 Bcf as of Friday, September 24th, 2021, according to EIA estimates. This represents a net increase of 88 Bcf from the previous week. Stocks were 575 Bcf less than last year at this time, and 213 Bcf below the five-year average of 3,383 Bcf.
Price action towards the end of last week indicated the presence of strong short-term sellers.
Looking to weather, in the short-term, US national demand is trending towards very low levels, according to Natural Gas Weather.
The weather service said “A messy pattern continues as numerous weather systems again impact the US this week. One system is over the Northwest, a second tracking into the Southwest mid-week, and a third extending from the Great Lakes to the South and Southeast.”
There are reports of tropical storms and hurricanes swirling over the Atlantic. Should we be looking at another Hurricane Ida, then US infrastructure could be about to take another big hit. Supplies would get even tighter.
Oil & gas stage major surge
Crude oil and natural gas are off to a flying start this week with market conditions perfectly aligning to create strong price action.
It’s been an exceptionally good couple of days for oil prices.
The key WTI and Brent Crude benchmarks are heading in one direction as they carry on the momentum built up over the weekend.
As of Tuesday, WTI had passed $76.33, making 1.1% on the day, and continues on its upward trajectory.
Much can be said of Brent. The North Sea benchmark is aiming to break the $80 level. At the time of writing, Brent futures were trading for around $79.47 after making 1.15%.
Why the rally and why now? It’s a combination of tighter global supplies, trader confidence, and strong American Petroleum Institute (API) numbers. The three together have created a perfect price storm, hence the strong price action we’re currently seeing.
Firstly, it looks like energy markets are the place to be right now for traders. They appear to be pushing these new highs and are confident in the market’s overall strength.
The API’s inventories report from last week helped underpin this market confidence too. The US has long been a bellwether for oil demand – it is the world’s largest consumer after all – which makes numbers from the API or EIA particularly useful.
The API reported a 6.108m barrel drawdown for the week ending September 17th. Market estimates forecasted a decline of 2.4m.
As the US economy opens up, energy-intensive industries are starting to roar back to life, hence the higher-than-expected drawdown. It’s much the same story in developed economies worldwide as they look to return to post-pandemic normality.
As winter heating season approaches, and supplies tighten, we’re possibly going to see oil prices remain strong as temperatures drop.
Goldman Sachs is feeling particularly confident, having revised its year-end price targets up to $87 for WTI and $90 for Brent.
Goldman said: “While we have long held a bullish oil view, the current global oil supply-demand deficit is larger than we expected, with the recovery in global demand from the Delta impact even faster than our above-consensus forecast and with global supply remaining short of our below consensus forecasts.
“The current oil supply-demand deficit is larger than we expected, with the recovery in global demand from the Delta impact even faster than our above-consensus forecast and with global supply remaining short of our below consensus forecasts.”
Price action is still very much a tightrope act. With the news that US Shale is ready to start drilling, and could add up to 800,000 bpd to supplies, the supply/demand balance could be upset.
Natural gas trading
If you thought crude oil was in a strong position, wait until you see natural gas.
Natural gas prices rose sharply on Monday to reach close to yearly highs at $5.30 before soaring to an unprecedented $6.13 on Tuesday morning.
A squeeze on supply caused by Hurricane Ida is offering support in the US. A large chunk of Gulf of Mexico and Southern US infrastructure is still closed for repairs or maintenance, lowering supply levels, after being hit by Ida earlier in September.
Let’s be clear: this is a global phenomenon. Simply put, there isn’t enough natural gas currently to satiate demand.
Prices of utility gas are skyrocketing in the US, EU, and UK as well as in Asia where demand is intensifying.
Switching back to the US, we should be in the midst of a sustained inventory build-up. It’s injection season – the period where more gas is squirrelled away in anticipation of high winter demand. However, it appears that
The latest Energy Information Administration (EIA) data showed a build-up of 76 billion cubic feet (Bcf) for the week ended September 17th. This was higher than the expected 70 BCf – but stocks remain some 598 Bcf lower than this time last year.
Looking at short-term weather-driven demand, Natural Gas Weather reports: “National demand will remain light this week as highs of 60s to 80s rules most of the U.S. and with very little coverage of highs into the 90s. Overall, national demand will be low to very low into the foreseeable future.”
Are these five gas crisis stocks worth a look?
As the European gas crisis threatens to go global, Morgan Stanley eyeballs some stocks that could benefit from the current conditions.
Gas crisis stocks
Gas prices soar in Europe
The EU’s natural gas import prices have skyrocketed 440% in recent weeks, putting massive strain on energy firms across the continent. The same is true in the UK where surging gas prices have caused several small energy suppliers to fold completely.
In the US, prices were up 100% year-on-year midway through September.
Globally, prices are roughly 250% higher than they were in January.
Henry Hub natural gas futures are showing rapid daily gains. At the time of writing, the HH contract is up over 7.2% in trading today. Prices are approaching yearly highs at $5.53.
We’re very rapidly approaching crunch time. The UK, for example, only has enough gas to last four or five winter days. Combine with food and petrol shortages, the winter is looking very cagey for Britain right now.
The US should also be gearing up injection season right about now. Usually lasting up to Halloween, injection season is when natural gas stocks start to build in preparation for high winter demand. The latest Energy Information Administration (EIA) data showed a build-up of 76 billion cubic feet (Bcf) for the week ended September 17th. This was higher than the expected 70 BCf – but stocks remain some 598 Bcf lower than this time last year.
Skyrocketing prices can be explained simply: there isn’t enough to go around.
Cold temperatures around the world last winter led to higher-than-expected drawdowns. Without adequate inventory replenishment, things were always going to escalate.
There is also heightened consumption and competition from Asia to contend with. Wood Mackenzie estimates that Asia, in particular China, will account for 95% of worldwide LNG demand growth by 2022. China’s appetite for LNG is such that even the $400bn, 30-year deal Beijing struck with Russia’s Gazprom in 2014 will not even scratch the surface of China’s gas requirements.
A perfect gas storm has been brewing and we’re seeing the cons
Which stocks can potentially benefit from the gas crisis?
According to Morgan Stanley, the current market conditions are ripe for investors and traders looking to add utility firms to their portfolios.
The five stocks selected by Morgan Stanley include:
“Buy Ørsted (Overweight) and Iberdrola (Overweight) on weakness: We recognise that the recent gas clawback will have a negative impact on 2021 and 2022 earnings for Iberdrola … triggering EPS downgrades. However, this appears well priced in with Iberdrola’s market cap,” Morgan Stanley analysts said in a statement.
For context, the Spanish government has announced a 2.6bn euro tax on energy firms to help protect consumers.
The bank also said Ørsted has an estimated 34% potential upside to its price target, while for Iberdrola the figure is 38.7% (within Morgan Stanley’s 12-18 month price target).
Morgan Stanley also said: “We see RWE (Overweight), EDF (Overweight) and Engie (Overweight) as our preferred names to play the strength in power prices, with limited contagion risk from political intervention.”
Of course, you could also look at trading pure natural gas contracts too away from stocks. Forecasts are calling for this winter to be one of the coldest for years, with the US meteorological department saying February will be the coldest month.
There may also be some overlap in the above for those interest in renewable energy. Ørsted covers 29% of the world’s offshore wind power segment. The Norwegian energy supplier made our list of renewable energy stocks to watch in 2021 as a result of its major market presence and future potential.
Cryptocurrency update: China’s crypto clampdown intensifies
Beijing announces some of the toughest measures against cryptocurrency to date.
China announces harshest anti-crypto measures yet
Bitcoin was rocked on Friday by a big right hook delivered by the People’s Bank of China.
China’s central bank has ruled that all cryptocurrency transactions made in the country, and all those coming from overseas made by domestic Chinese citizens, are illegal.
Naturally, this caused a landslide in BTC prices. The coin dropped over 8% on the day – although it has since clawed back some of those losses and is trading into the green as of Monday 27th September.
This is the harshest and most blatant anti-crypto measure undertaken by China to date.
Beijing’s official stance is that cryptocurrency is a) illegitimate, b) an environmental disaster, and c) something it cannot control completely. Freeing finances from government oversight is the entire point of decentralised finance (DeFi) after all. In a country as centralised as China, that’s a no-go.
From here on out, it’s pretty much a given that Chinese measures against crypto will get even tighter.
The POBC has said monitoring will step up to stop banks handling any crypto-related transactions. Bank bitcoin transactions were ruled out by China as early as 2013, so really this shouldn’t come as a surprise.
Authorities will now seek to eradicate mining operations entirely. Recently, over 10,000 mining rigs were seized in Inner Mongolia, one of the busiest regions for cryptocurrency mining in China, as the nation steps up its efforts.
This could have major consequences for global Bitcoin supplies. The hash rate slowed dramatically when the last wave of Chinese anti-mining operations went into overdrive back in June. Expect more of the same – although that could benefit prices (scarce supply + high demand = profit?).
Now it’s a scramble from international exchanges to drop Chinese customers.
Huobi and Binance, two of china’s biggest exchanges, has stopped registrations for new Chinese clients. Wallet supplier TokenPocket has also said it will be winding up services for mainland Chinese customers and would willingly embrace regulation.
Twitter rolls out Bitcoin tipping
The rest of this article will look at those who feel more positively about crypto. Twitter CEO Jack Dorsey is certainly one of them.
It was announced last week that Twitter will now start accepting tips in the form of Bitcoin payments. That’s right: if you like a tweet you can show your appreciation by sending the original poster a little chunk of cryptocurrency for their troubles.
Twitter has turned to Lightning to enable Bitcoin integration. The feature is currently available for iOS users only. Android Twitter browsers will support it soon, according to Dorsey, but the launch date is yet to be revealed.
Clicking on the feature enables users to tip creators through third-party services like CashApp, which is operated by Square, Jack Dorsey’s payment platform.
There is also talk of Twitter going in hard on non-fungible tokens (NFTs) – a new digital way to present and own media.
These digital assets — often JPEG artwork — have exploded in popularity and are often used as profile pictures. Twitter is working on a solution to authenticate whether a user actually owns said JPEG.
This could give NFTs a fresh sheen of legitimacy.
Either way, it’s very clear that Jack Dorsey is a big crypto fan. It might also be helping crypto prices in general. On Friday, following the POBC statement, the market was a sea of red. Now, it’s much more balanced with key tokens back in the green.
That’s the power of social media for you.
Cardona to pump $100m into DeFi
While China has made its stance on decentralised finance abundantly clear, there are others who are convinced it is the future.
Emurgo, the investment wing of the Cardano network, which uses the coin of the same name, has pledged to invest $100m into developing DeFi.
The announcement was made by Emurgo CEO Ken Kodama at the 2021 Cardano Summit – an annual conference dedicated to everything involving the world’s fourth-largest blockchain.
Kodama said this major investment would accelerate the development of the Cardano ecosystem.
We will carry out an investment of 100 million dollars to accelerate the development of the Cardano ecosystem.
Please contact us if you would like to receive investment funds, our network, information and management support.
We will create a dedicated operation from 2022. https://t.co/m0uwiptMOx
— Ken Kodama (@KenKodama_Biz) September 26, 2021
Emurgo’s plan seems to cover all bases, seeking to boost blockchain education, NFT solutions, and pioneer DeFi as a whole.
This isn’t the only thing Emurgo plans to invest in. At Sunday’s Summit, the company announced it also plans to pump more funding into African artificial intelligence, blockchain, and smart technologies firm Adanian Labs.
As well as being a blockchain network, Cardano is also one of the world’s foremost altcoins (i.e., a token that is not Bitcoin). Despite this big announcement, the token was in the red. Cardano had fallen 2.5% in trading on Monday morning.
Oil pulls back while gas remains strong
Key benchmarks have dropped from highs seen last week while natural gas, while dipping, is still strong.
External factors have caused oil prices to peel away from the big gains made last week. Prices began falling on Friday, and they’ve subsequently stabilised a little as of Tuesday.
WTI had breached the $71 level while Brent was punching towards the $74 level. Both benchmarks were showing positive movements on Tuesday morning, with WTI up nearly 1% on the day after falling by the same level on Monday. Brent had made 0.6%.
A stronger greenback has been hitting dollar-denominated crude across the week. At the upcoming Fed meeting, markets are expecting to see more concrete stimulus tapering agreements, which has lit a small fire under the dollar.
Elsewhere, the potential collapse of Chinese property giants Evergrande is causing massive ripples around the world. The effects are starting to seep into oil markets as China ponders a potential financial crisis.
Another threat to oil prices is increased supply. Supply/demand metrics have been on a delicate balance throughout the duration of the pandemic. Adding more could upset that.
Nine new rigs have been added to US infrastructure, according to Baker Hughes, bringing the total up to 512.
Despite this, 23% of Gulf of Mexico rigs remain shuttered thanks to Hurricane Ida. We may not be seeing a US oil glut just quite yet, but it is something to think about.
In terms of demand outlook, we all know Delta variant has thrown a rather large spanner in the works this year.
However, OPEC+ has revised its demand recovery predictions for 2022 upward by 900,000 barrels. A mix of strong economic growth and higher fuel consumption should power total annual demand to 100.8m bpd next year, according to OPEC+.
The US’ decision to open up flights to fully vaccinated travellers from the UK and EU will also help generate more demand as trans-Atlantic flights pick up.
A quick look at the most recent US crude inventories report shows a 6.4m barrel drawdown. At 417.4 million barrels, US crude oil inventories are about 7% below the five year average for this time of year, according to EIA data.
Natural gas trading
Natural gas prices started the week by pulling back from the previous week’s highs. As of Monday, prices had dropped from the mid-week $5.60 level to the $5.01 mark.
It’s thought that higher winter-driven demand has already been priced into natural gas contracts, hence the prices we’re seeing now.
In the short term, US weather patterns point to medium to low demand this week, which may help bring prices back down to earth.
Working gas in storage was 3,006 Bcf as of Friday, September 10, 2021, according to EIA estimates. This represents a net increase of 83 Bcf from the previous week. Forecasts called for a 76 Bcf build-up.
As we’re in injection season, the US could be about to fall behind the 3.5 trillion cubic feet needed to satiate winter demand. If conditions are particularly harsh, then prices may rocket as temperatures drop.
For context, 2020’s winter build-up, as of the close of injection season on October 31st, was over 3.9 Tcf.
It looks like there is some catching up to do for US gas stockpiles.
Elsewhere, China’s gas consumption potential is being flagged as “stunning”. Alexey Miller, CEO of Gazprom, has said the world’s second-largest economy’s natural gas consumption is growing at a faster rate than any other Asia-Pacific nation.
According to Miller, China’s natural gas consumption increased by more than 15% in the first half of 2021. Imports increased by more than 23% during the same period.
This will all be music to Miller’s ears. In 2014, Gazprom inked a $400bn supply deal with China to deliver gas over 30 years.
Vaccines to spark oil demand growth- IEA
Vaccinations for Covid-19 are set to deliver a major boost for oil demand as concerns about the passage of the delta variant start to ebb.
“Already signs are emerging of Covid cases abating with demand now expected to rebound by a sharp 1.6 mb/d in October, and continuing to grow until end-year,” the International Energy Agency (IEA) said on Tuesday.
Global oil demand is now expected to rise by 5.2m bpd this year and by 3.2m bpd in 2022.
Unexpected outages during August forced a decline in supply for the first time in five months, the IEA said, which extended the sharp drawdown in global oil stocks.
“The most severe by far was Hurricane Ida, which wreaked havoc on the key US Gulf Coast oil producing region at the end of August, knocking 1.7 mb/d offline.”
But concerns over delta and its impact on oil demand has kept prices in check.
WTI rallied to $71 and Brent to above $74 as robust market fundamentals continue to underpin prices.
And after being washed out in July and August, speculative positioning is looking more bullish. According to the CFTC, money managers raised their net long US crude futures and options positions in the week to Sep 7th.
Yesterday, OPEC said in its latest monthly report that it expects stronger demand for oil next year than previously forecast. OPEC is sticking with the 6m bpd increase in 2021 vs 2020 , with Q3 showing resilience despite the ongoing problems with the pandemic. The outlook for 2022 is bullish, with OPEC raising its oil demand forecast for next year by 900k bpd from last month’s outlook, taking the expected demand growth in 2022 to 4.2m bpd.
Nat gas crunch
Last week saw natural gas prices continue to roof with $5 breached as a combination of low supply, low stocks and strong demand creates upward pressure. About three-quarters of Gulf of Mexico production remains offline following Hurrican Ida.
Prices have doubled YTD and have hit the highest since February 2014. Now market participants worry that a colder-than-average winter in the US could see prices spike again. “Anything closer to [or colder than] a full standard-deviation form average would likely trigger a price spike to cause demand destruction with gas above $10/mmBtu,” Goldman Sachs analysts said in a note.
European natural gas benchmarks keep hitting new highs, whilst Henry Hub natural gas prices were up another 4% to $5.20 on Monday, a fresh 8-year high and a 14-year high for this time of year. Demand for natural gas is actually growing but supply is failing to keep pace.
In September’s Short Term Energy Outlook, however, the Energy Information Administration said it expects consumption of natural gas to decline in 2021 and 2022 from 2020 levels. “We forecast that consumption of natural gas will decline in all end-use sectors in the United States except in the industrial sector and for other non-sector-specific uses (lease and plant fuel, pipeline and distribution use, and vehicle use).The largest decline will occur in the electric power sector,” the report said.
Can oil reach $100 per barrel?
Several factors could push oil towards $100 per barrel as the markets look to sustain momentum. In natural gas, we can see a supply/demand deficit supporting prices.
Despite the Saudi price cut for the Asian market, oil started the week fairly strongly.
Prices stabilised and have continued to hold ground at key resistance levels after OPEC-JMMC monthly talks. At the time of writing, WTI was trading for around $69.00. Brent crude is trading for $72.43.
$70 may be the real test for WTI going forward after the benchmark was pushing towards that region on Tuesday morning.
One important takeaway from oil markets at the start of the week is the size of the drawdown shown in the latest EIA crude inventories support. Crude oil inventories showed one of the highest drawdowns to date, according to EIA data for the week ending August 27th. Stocks dropped by 7.2m barrels from the previous week then. Working US crude oil inventories now stand at around 425.4m – 6% below the five-year average.
Don’t be surprised if this isn’t sustainable – not due to demand, but due to the impact of Hurricane Ida. Much of the US’ oil infrastructure lay in its path, and several rigs in the Gulf of Mexico were closed as the storm passed through. We’re likely to see lower numbers in the next report on Thursday.
Removing Ida’s impact from the equation, If conditions are right going forward, some analysts believe an $100 oil price can be reached if not this year, then in 2022.
OPEC+ is feeling particularly robust with regards to the wider demand picture. It’s upgraded its demand outlook to 4.2m bpd by 2022.
The cartel decided to stick with its 400,000bpd monthly output hikes in its September meeting. It’s a fairly harmonious realm over at OPEC+ HQ right now. September’s discussions took under an hour to reach an agreement – far shorter than the month-long tussle seen in August.
Other factors at play that could push oil towards the $100 mark include:
- Record revenues from oil majors, particularly shale producers – According to Rystad Energy, US shale firms are on course to create record-breaking revenues this year, to the tune of $195 billion before factoring in hedges in 2021.
- Demand recovery in China – China is the world’s largest crude oil importer. It’s not slow to act when containing new COVID-19 outbreaks. The latest Beijing lockdown halted private travel, but now apparently the city is COVID-case free, so it appears these ultra-restrictive lockdown measures work. Reports are now saying Chinese importers have picked up delivery requests and China could now be on the way to full demand recovery.
Goldman is still a firm oil bull. The investment bank estimates prices will hit $75-80 by the end of 2021.
While this is all encouraging, the simple fact is the virus is still knocking around. We are still in a pandemic. Worldwide oil demand recovery is tied in with case numbers. There are indicators that infections across the globe are starting to fall, but there is a long way to go until we’re back to normality.
Natural gas trading
Natural gas prices have continued to soar to regions not seen for years. A mixture of robust heat, flat inventories, and Hurricane Ida’s impact continue to buoy prices.
Weather is expected to heat up in key US demand areas across the coming weeks. Natural Gas Weather rates demand forecast as a medium at the time of writing, but this could increase to high along with rising temperatures.
Supply squeezes are also doing their bit to support prices. According to data from the EIA, the total average natural gas supply fell by 2.3%, or 2.3 Bcf per day, compared with the previous report week.
Drops in output are likely linked with the effects of Hurricane Ida. Much of the US’ gas production infrastructure sat squarely in Ida’s path. Two weeks later, the process of reopening gas facilities is still underway.
Prices could rise further beyond their already strong highs if this is the case. The current supply/demand deficit, particularly in hurricane-hit regions of the US, shows a market imbalance, which is partly why natural gas prices are performing well.
At the time of writing, natural gas was trading at the $4.671 level.
Working gas in storage was 2,871 Bcf as of Friday, August 27, 2021, according to EIA estimates. This represents a net increase of 20 Bcf from the previous week. Stocks were 579 Bcf less than last year currently and 222 Bcf below the five-year average of 3,093 Bcf. At 2,871 Bcf, total working gas is within the five-year historical range.
Oil braces for OPEC+ meeting & Hurricane Ida fallout
Traders look to gauge the impact of Hurricane Ida on US oil and OPEC+’s September meeting this week, while natural gas seeks a supply/demand in the battered southern states.
Hurricane Ida smashed through US on and offshore oil production infrastructure at the weekend, leaving behind a trail of closed or damaged rigs in its wake. Even the crucial Colonial Pipeline, a vital fuel artery, was closed.
All bad news for oil prices? Yes and no. We’ve seen in the past that extensive shuttering of infrastructure can actually be bullish if it leads to a supply squeeze. High demand meeting lower output equals higher prices.
But Ida’s devastation isn’t limited to rigs, refineries, and pipeline shutdowns. We can’t forget the civilian population. Homes have been smashed. One million people in Louisiana are without power. In the current climate, the numbers of people going to work in affected Southern states will have dropped and with it fuel demand.
The picture is still blurry – but oil has managed to keep its gains from across the past week into trading this morning. The key benchmarks are approaching levels similar to those at the end of May when prices really took off.
Oil also got another boost this week when OPEC+ members indicated it reconsider its planned output increases in the wake of new market realities.
Kuwait’s Oil Minister Mohammed Abdulatif al-Fares on Monday said: “The markets are slowing. Since COVID-19 has begun its fourth wave in some areas, we must be careful and reconsider this increase. There may be a halt to the 400,000 (bpd) increase.”
The cartel meets on Wednesday to discuss how best to proceed in a Delta-variant dominated world.
We’ve seen rising cases impact on oil demand throughout Asia and in China, although new reports suggest Chinese imports are picking up pace after a couple of months of slowing output.
OPEC+ has had to really step up its supply/demand balancing act over the last 18 months or so. It had denied President Biden’s request to open the taps wider in the last month, and this talk of halting production raises could help support prices if demand continues to fall.
US crude oil inventories experienced another drawdown in the EIA’s latest report. According to the energy agency, US crude stockpiles decreased by 3.0 million barrels from the previous week.
At 432.6 million barrels, U.S. crude oil inventories are about 6% below the five year average for this time of year.
Natural gas trading
Hurricane Ida’s impact isn’t just limited to oil. The heartland of US LNG production lies in Ida’s destructive path. Some 95% of Gulf of Mexico production has been affected so far.
Onshore infrastructure in its path fared better. Any damage done has not been as serious as previously forecast
Price action still remains relatively robust. Natural gas is trading for around $4.328 at the time of writing, although it has fallen away from the yearly highs seen a couple of weeks ago.
But the real test now is demand. A million Louisiana citizens are without power. Hot temperatures are potentially on their way, but without the ability to air condition their homes, cooling gas demand may sink in these key areas. That could weigh heavily on price action going forward. We’ll know more once a concerted relief effort has been made.
Away from Louisiana, demand could be generated by hot temperatures in California, the Plains and Texas, but it remains to be seen if this will offset demand from hurricane-hit regions.
The US natural gas rig count, however, has dropped – likely shuttered as Ida made its way through the Gulf. According to Baker Hughes, the rig count dell by 5 to 97 last week. That’s the lowest seen in over two months.
Because this was hurricane-induced, however, we may see these rigs come back online soon.
Working gas in storage was 2,851 Bcf as of Friday, August 20, 2021, according to EIA estimates. This represents a net increase of 29 Bcf from the previous week. Stocks were 563 Bcf less than last year at this time and 189 Bcf below the five-year average of 3,040 Bcf.