Optimistic demand recovery fuels oil prices

Commodities

Oil markets are in a good mood this week so far. Prices are up alongside demand recovery. Natural gas, on the other hand, is about to transition into cooling season. Prepare for a bumpy gas price ride.

Oil trading

Oil prices started the week on a stronger footing. At the time of writing, WTI had cleared $65.50 and was knocking on the door of $66. Brent oil’s performance was similar. The contract had passed the $67 level and was now trading at $68.20.

Fuel demand is rising in tune with OPEC+’s optimistic outlook forecasts. Increased personal travel, reopening of economies, and largely successful vaccine rollout in key crude importers, is generally helping prices keep above $60.

Air travel passenger numbers are increasing too. The US Transportation Security Authority (TSA) reported over 1,800,000 passengers had passed through domestic airports on May 23rd – the highest number since March 2020’s mass flight grounding.

While this is all good news for oil markets, gains will likely be capped by rising coronavirus cases in and around Asia. India continues to grapple with the virus, for instance. We are by no means free and clear yet.

Let’s not discount Iran either. There’s been a lot of industry noise regarding Iran’s reintroduction to crude markets. US-led sanctions on Iran could be lifted and a new deal hashed out. However, this now looks unlikely, so a glut of Iranian crude is unlikely to wash over oil markets any time soon. Iran will continue to loom in the background, with pumps primed waiting for a deal to be struck.

US refiners are could be lining up for a big payday. Gasoline production margins have skyrocketed in the wake of the recent Colonial Pipeline shutdown. Margins are up to $24 per barrel from around $10.

Gasoline inventories amounted to 234 million barrels, less than 1% above the pre-epidemic five-year average, in the EIA storage report for the week ending May 14th.

Total US commercial crude oil inventories increased by 1.3 million barrels from the previous week. At 486.0 million barrels, US crude oil inventories are about 1% below the five-year average for this time of year.

As of Monday, 24th, a tropical storm was brewing in the Gulf of Mexico with a 60% chance of becoming a cyclone. This may result in a temporary closure of US Gulf and Texan oil & gas infrastructure should the storm increase in intensity.

Natural gas trading

The seasonal shift as we transition from spring to summer will affect natural gas prices. We’re already seeing it as prices lost momentum at the tail end of last week. Warmer temps mean less heating fuel demand, but it does mean a rise in cooling gas to power AC units.

Demand declines on lower heating consumption in the residential and commercial sector and reduced export volumes. Total US natural gas demand fell by 10.8% compared with the previous report week, according to the EIA’s report for week ending May 14th.

Working gas in storage was 2,100 Bcf, according to EIA estimate, a net week-to-week increase of 71 Bcf. Stocks were 391 Bcf less than this time last year and 87 Bcf below the five-year average of 2,187 Bcf.

As of this week, Natural Gas Weather suggests temperatures heating up across the nation, ranging from mild in the Northwest to very hot in Texas and the South. We may see a small moderate spike in demand towards the end of the week as cooling gas consumption may increase.

In terms of LNG, the US’ rising position maybe under threat. Qatar has pledged to open the world’s largest liquid natural gas production and export hub, which may be more convenient and cheaper for Asian markets to draw from.

Other LNG producers weren’t exactly ecstatic on the news. Qatar is also said to be dropping prices and expanding into the spot market to maintain its global LNG dominance.

The US has been able to capitalise on a boom in shale gas production. It’s gone from net importer to gas exporter. With the Qatar news, however, we may start seeing less US liquid natural gas on global markets.

Feed gas volumes at Texan gas terminals has been at near-record highs since February. Will these levels continue once Qatar’s latest megaproject gets rolling?