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Where can oil go from here?
With crude oil prices strengthening, markets are asking just how high oil can climb right now.
Crude starts the week on a strong footing
Two key oil benchmarks began this week in a strong position.
WTI was flitting between $81.50 to $82.28 between Monday and Tuesday, even reaching $83.17 on Monday.
Brent is closing in on all-time highs. Trading at around $84.80 at the time of writing, its only a couple of percentage points away from its October 2018 high of $86.
All good news if you’re an oil bear.
So, what’s supporting prices this week? It’s the old supply and demand struggle.
Saudi Arabia helped stoke the fires a little with its refusal to open the OPEC+ taps further. The kingdom and OPEC chief said last week it and the cartel were committed to their monthly production boosts.
Each month until at least April next year, OPEC members will be collectively upping production by 400,000 bpd.
Rapidly rising natural gas and coal prices could also benefit oil. As winter rolls in, and temperatures drop, the high costs from those two commodities could necessitate a switch to oil heating. Crude oil’s already a high-demand product as it is. Supplies are also being kept tight, at least from OPEC+.
The conditions are there for a sustained rally – but we have to be careful of market exhaustion. Support levels identified for WTI and Brent have been variously stated at $75 and $80 respectively by oil analysts.
But some market observers are much more optimistic…
Billionaire businessman suggests $100 oil price is on the way
United Refining Company Chief Executive John Catsimatidis has said he believes crude oil can hit $100 this year.
“With oil nearly at $84 this morning, we are going to see $100 oil, it looks like, there’s no sign of it stopping,” Catsimatidis said in an interview with Fox Business on Monday.
The billionaire cited inflation and rising energy costs across the board as reasons why crude might break the $100 barrier.
Catsimatidis’ comments mirror those of another big oil player: Russian President Vladimir Putin.
When quizzed by a CNBC journalist during the Russian Energy Week summit last Wednesday, Russia’s leader said $100 is “quite possible”.
However, Putin toed a cautious line saying: “Russia and our partners and OPEC + group, I would say we are doing everything possible to make sure the oil market stabilizes.
“We are trying not to allow any shock peaks in prices. We certainly do not want to have that — it is not in our interests.”
It kind of is in Russia’s interest to have a high oil price. 40% of government revenue stem from hydrocarbons, but right now it appears Russia is more concerned with playing.
More US shale oil on the way?
Shale oil could spoil OPEC+’s party.
More US rigs in the Permian Basin are coming online. As it stands, the rig count is 136 rigs higher in this prime shale geography than this time last year.
Analysts believe Permian infrastructure could end up pumping out 4.9m bpd of crude by early 2022. Some are even expecting it to hit this number this month.
OPEC estimates suggest the US will add 800,000 bpd to production via shale sources next year. The EIA figure is roughly 700,000 bpd. Plenty of black gold to help calm the Biden White House’s supply jitters.
Biden and co. have been calling for OPEC and oil producers to step up their production as gasoline prices rise in the US. However, OPEC is not budging as mentioned above. I mean, if you do insist on outfitting regular cars with thirsty V8 motors, you will pay the gasoline cost. Did America not learn anything from the 70s energy crisis?
US drillers are being advised not to chase high oil prices though at the risk of drilling themselves into oblivion.
Looking at storage US commercial inventories rose 6.1m bpd according to the EIA stockpile report for the week ending October 8th. At 427.0 million barrels, U.S. crude oil inventories are about 6% below the five year average for this time of year.
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.
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.”
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.
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.
What’s happening with oil prices?
Oil prices have slipped into the red. We take a look at why.
A mixed outlook picture
It’s the end of the first quarter of 2021 and things are looking strong for oil: prices are up; demand forecasts are high; OPEC & allies are confident they can raise output; vaccine rollout in key crude importers is going well.
Flash forward to the present, and you’ll see a different picture. Uncertainty has crept back into global oil markets. Key benchmarks have fallen away from yearly highs and are trading at levels seen back in April.
At the start of the week, oil was trying to stabilise, but the pandemic may limit that.
Delta-variant COVID-19 cases continue to sprout up at an alarming rate in key crude importers and oil consumers. China and India, for instance, continue to see new spikes totalling tens of thousands of cases every day. They continue to mount in the USA too.
This has caused the reintroduction of restrictions on movement in countries like China. As the oil industry revolves around transport, and eyes on petrol and jet fuel stocks, restricted movement points to lower demand.
China has even closed some of its ports and major oil hubs in response to mounting cases, signposting that lower import volumes are on the horizon.
The spread of the Delta variant has caused some institutions to alter their demand outlooks.
The International Energy Agency said in its latest monthly oil report that demand had slumped by 120,000 bpd in July. It now believes growth would be 500,000 bpd lower in the second half of the year than previous estimates suggested.
“Growth for the second half of 2021 has been downgraded more sharply, as new COVID-19 restrictions imposed in several major oil-consuming countries, particularly in Asia, look set to reduce mobility and oil use,” the IEA said. “We now estimate that demand fell in July as the rapid spread of the COVID-19 Delta variant undermined deliveries in China, Indonesia and other parts of Asia.”
Goldman Sachs’ recalculated oil forecasts predict an increase in oil deficits from 1 million bpd from 2.3 million bpd in the short term, although it does still expect demand to rise alongside vaccination rates worldwide.
OPEC+ has said it feels no need to boost output beyond the already agreed 400,000bpd from August onwards. All of the cartel’s actions since the start of the pandemic have been to blunt COVID’s impact on worldwide markets. There’s still an optimistic tinge to OPEC’s thinking, but we’re by no means out of the woods yet. If anything, it looks like the trees are getting thicker.
The Fed has also signalled it may soon end stimulus in this month’s releasing of July’s meeting minutes. Its $120bn a month bond buying programme has acted as a bit of a cushion for commodities markets. The implication that this could be pulled away soon has also impacted crude oil prices.
Oil markets’ reaction
Key benchmarks have slipped away from their 2021 highs as the demand picture gets muddled.
At the start of July, for example, WTI was pushing above $76. At the time of writing, West Texas Intermediate futures were exchanging hands for around $63.40.
The same can be seen with Brent crude. The UK benchmark was eyeing up breaking the $80 level earlier in July. As of 19th August, Brent had slipped to $66.40.
Hedge funds have been in bearish sell-off mode for the past six or so weeks too.
Reuters reports that hedge funds and other money managers sold the equivalent of 64 million barrels in the six most important petroleum futures and options contracts in the week to August 10th.
Total institutional sales have been roughly 213m barrels, split between 183m sales of crude, and 29m sales of refined oil products.
Are there any reasons to feel good about oil right now?
In a word, yes. There are still lots of positives.
Vaccine rollout worldwide is picking up steam. In the UK, for example, 75% of adults have had their second does, helping drastically slash the number of COVID deaths nationwide. Over half of the US population has been doubled jabbed too. China still has some way to go, but factoring in over a billion people live there, a 24% full vaccination rate is not a bad showing.
1.87bn people, roughly an 8th of the global population, have been fully vaccinated.
Oil rig counts are creeping up too. At its last review, Baker Hughes says nine rigs were added this week. Total US operational oil rigs now stand at 397 – up 172 from this time last year. That said, it will be a strong balancing act to ensure that improved output levels stemming from more rigs does not lead to a price pressure-inducing oil glut.
Crucially, oil stocks are draining. OECD stocks were 131m barrels below the five-year average in June. In the report for the week ending August 13th, the EIA US crude inventories showed a 3.2m barrel drawdown. US stockpiles are now 6% lower than the five-year average too.
It’s very possible that 2022 will likely result in an oil deficit. But for producers like those OPEC states and its allies, this will be a good thing, just on a simple supply and demand basis. What we’re seeing now is possibly just a short term down cycle.
Confidence will return, but it does depend on the Delta variants’ course right now.
Oil prices look to stabilise while natural gas rallies
Delta-variant cases continue to weigh on oil markets as crude prices attempt to stabilise. Meanwhile, natural gas appears to be on the cusp of another strong rally despite weekend pullbacks.
Oil started off the week on a subdued footing once again.
The demand picture is under further scrutiny amidst rising Delta variant COVID-19 cases worldwide.
The IEA says it has sharply downgraded its H2 outlook.
“Growth for the second half of 2021 has been downgraded more sharply, as new COVID-19 restrictions imposed in several major oil-consuming countries, particularly in Asia, look set to reduce mobility and oil use,” the Paris-based IEA said in its monthly oil report. “We now estimate that demand fell in July as the rapid spread of the COVID-19 Delta variant undermined deliveries in China, Indonesia and other parts of Asia.”
Goldman Sachs has recalculated its oil forecasts too. It has dropped its global oil deficit predictions to 1 million bpd from 2.3 million bpd in the short term, although it does still expect demand to rise alongside vaccination rates worldwide.
On the other hand, OPEC+ is sticking to its script. It has yet to change its predictions. But with the cartel ramping up production from August onwards, OPEC+’s efforts to balance supply and demand could backfire and force prices downwards. An oil glut is no good for suppliers after all.
We’re due the latest EIA crude storage reports today. Previous reports had shown a small build up, but the most recent figures suggest this was an anomaly.
For the week ended August 6th, US commercial crude inventories dropped 0.4m barrels. Storage levels were 6% below those from this time in 2020. Will we see a higher drop today?
On a more positive note, oil rig counts are up. Baker Hughes says nine rigs were added this week. Total US operational oil rigs now stands at 397 – up 172 from this time last year.
Natural gas trading
After weeks of strong levels, natural gas prices pulled back on Friday. As of Monday, gas had been trading at its lowest levels since July 28th. Prices had reached around the $3.830 mark.
Come Tuesday, and prices were once again heading back towards $4.00.
Natural Gas Weather called for moderate-to-high gas demand at the start of the week, citing high temperatures in the West, Plains and Texas as demand drivers.
However, current price action suggests traders have priced in peak summer temps. We may be looking at a loosening of the supply/demand balance, which may also explain why prices have started to drop away.
But with prices on Tuesday reversing the downward trend, it may be the case that traders are bracing for further hot weather. It’s an interesting scenario. One on hand, it appeared that gas had run out of steam. Now, it’s gaining momentum once more, so it appears we’re not out of cooling season by any means, despite September being only two weeks away
US working gas in storage was 2,776 Bcf as of Friday, August 6, 2021, according to EIA estimates. This represents a net increase of 49 Bcf from the previous week.
We’re still in the midst of injection season. There’s another twelve weeks left before a generalized shift towards winter demand season.
Anything could happen to turn the market bullish or bearish during that time, but it appears we’re experiencing a summer-to-autumn price correction right now, despite the current price rally.
Global Delta cases puts pressure on oil despite US bull run
US oil looks like it’s in great shape, but pressure is being put on prices by rising Covid-19 Delta variant cases worldwide.
EIA storage data records another successive drawdown in its latest report. For the week ending July 23rd, crude inventories dropped by 4.1m on a week-by-week basis. That puts them roughly 7% below the five-year average for this time of year.
We can see US oil stocks continue to drop, which signposts strong demand recovery. Gasoline stocks, which dropped by 2.3m barrels, smashed estimates of a 916,000 drop, fitting this narrative.
The bullish signs for US oil continue. Stocks at the Cushing, Oklahoma hub were seen at 36.299m barrels on Tuesday 27th – down 360,917 from the previous week’s volumes.
Turning to oil prices, Brent and WTI pulled back slightly from their weekend levels to trade at $73.24 and $74.78 respectively on Monday afternoon.
The markets thought support could have come from the bullish state of US oil inventories, as well as developments in the Iran nuclear deal.
Traders were bracing for an Iranian crude glut, should the deal be successfully concluded soon, but it appears that a new deal may be off the cards completely. Good news for the tricky global supply balance.
As of Tuesday morning, however, oil had slid back further. WTI was now at around $71.80, with Brent averaging around $73.40.
It appears oil prices may still run into resistance via slowing manufacturing in key economies. Both China and the UK reported drops in factory output in July, for example.
The big issue here is the Delta variant of Covid-19. Rising cases in China, the US, and in fact the world at large, has the market worrying about the demand recovery implications. Should the world enter a new lockdown phase, travel and manufacturing will likely drop off again. If that is the case, oil demand may fall as well.
It’s a tricky situation. All we can do is hope more people are vaccinated and that those vaccines prove resistant to the Delta variant.
Elsewhere, OPEC+ increased output by 610,000bpd barrels per day in July, reaching its highest levels since April 2020. Saudi Arabia, predictably, led the cartel in terms of output spikes, increasing its outward flows by 460,000bpd.
Oversupply could lead to bearish sentiment, counteracting US oil’s bull run.
Natural gas trading
Natural gas dropped back from its recent highs on Monday but was still trading above the $4.00 mark.
Where next all depends on the weather. Natural Gas Weather forecasts mild demand, although markets will be looking for heatwaves in Europe and the US for strong cooling gas consumption to support prices.
Per Natural Gas Weather’s US outlook: “National demand will ease to lighter levels this week as weather systems sweep across the eastern ½ of the US w/showers, thunderstorms, and highs of only 70s to lower 80s. The West into Texas and the Plains will be very warm to hot with highs of upper 80s to 100s as strong upper high-pressure rules.
“Temperatures will increase across the South and East late next weekend with highs warming into the mid-80s to lower 90s. Overall, MODERATE national demand this week, then increasing to HIGH late next weekend.”
Looking at storage, the EIA reports working gas inventories totalled 2,714 Bcf on the week ending July 23rd. Stocks were 523 Bcf lower than this time last year.
US LNG production appears to be relatively strong at 91.5 Bcf per week, but lower than the 93 Bcf estimated required to keep pace with global demand. Feed gas at key US infrastructure is cutting close to 11 Bcf across the week.