Rig counts jump on improving oil demand

Commodities

Rig counts are improving throughout North American production bases. Oil prices are up, as is natural gas. Is a strong week ahead for both commodities?

Oil trading

Oil started the week with WTI was trading at roughly $66.80, whereas Brent was around $70.00, putting it on a strong footing.

Rig counts have jumped up in response to oil prices strengthening. As of May 14th, 5 more US oil & gas rigs had come online, bringing the total to 453. The US rig count is now 114 times higher than this time last year, a strong indicator of higher demand. The Canadian rig count increased too, rising by 4 to bring the total to 59 active rigs.

The EIA’s oil storage report for week ended May 7th showed a 0.4m barrels decrease in inventories during the review period. US crude oil reserves stand at 484.7m barrels. Inventories are roughly 2% below the five-year average.

Total deliveries of finished petroleum products over the past month, are up 23% y-o-y the EIA reports. Deliveries total 19.1m bpd. Motor gasoline deliveries are up 41%, reaching 8.9m bpd.

The Colonial Pipeline, hit last week by a cyberattack, is once again operating at full capacity. This may help support prices going forward, as US East Coast oil and fuel supplies return to their normal volumes.

India’s Covid-19 nightmare continues with skyrocketing cases strengthening the call of a new national lockdown. The crisis has impacted Indian crude imports, dropping to a two-decade low.

In turn, fuel use has dropped off across May. Diesel, gasoline, and jet fuel consumption is down 20%, 20% and 38% respectively in the first half of May against April’s levels.

Natural gas trading

Natural gas was on a strong footing at the start of the week, breaking above the $3.00 level. Resistance is expected with $3.20 forming the largest barrier.

Natural gas storage volumes showed a week-by-week increase as per the EIA’s Weekly Storage Report. As of week ending May 7th, the latest data available, US inventories stood at 2,029 Bcf – 71 Bcf higher than the previous week.

However, across the year, natural gas inventories are 378 Bcf lower last year at this time and 72 Bcf below the five-year average.

Demand is expected to be low-to-moderate throughout from week commencing May 24th onwards, according to Natural Gas Weather forecasts. Showers and thunderstorms across Texas, the South and Northwest US will be offset by “near perfect” temperatures over the rest of the country, dropping demand levels. Temperatures won’t be high enough during this period to warrant cooling demand, while they won’t be cold enough for high heating gas use either.

In the short term, though, natural gas prices enjoyed a 5% jump on Monday. Warm weather systems in the US, particularly in the Eastern half, are accelerating the shift from heating demand to cooling demand. In practical terms, that’s higher demand from generators used to power air conditioning systems.

However, as we pointed out above, colder temps are on their way in the next couple of weeks, so the full shift from heating to cooling season won’t happen until summer really kicks in. As such, the 5% jump in natural gas prices may not be indicative of the course the market is currently steering.