Oil surges to seven-year high on OPEC+ decision

Commodities

OPEC and allies commit to production increases sending prices on a strong upward trajectory.

Oil trading

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.