Where can oil go from here?

Commodities

With crude oil prices strengthening, markets are asking just how high oil can climb right now.

Oil trading

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.

Cautious tone ahead of Powell’s Jackson Hole speech

Morning Note

There has been a mixed start to the open in Europe as investors look ahead with some caution to Fed chair Jay Powell’s Jackson Hole speech. Stocks are hovering around the flatline with the FTSE just in the green. Today in London the miners are back on the front foot with energy and basic resources leading the gainers, while tech led the decline as JustEat Takeaway.com fell 3%.

Explosions at Kabul airport were the big story and clearly didn’t help sentiment in the market on Thursday. Wall St opened higher with the Nasdaq Composite hitting a record high before getting shaken lower on the violence in the Afghan capital, though broadly stocks were already having a tough session. The major US indices all ended the day down by around 0.6%.

Whilst the situation in Afghanistan removed any idea of a fresh set of closing highs on Wall Street, there was anyways a sense of caution at the highs, which may not be a bad thing for a bull as it’s not the big end-of-rally melt-up you see as a bull run consumes itself. But it’s also not a sign of total confidence in valuations and that really depends on what the Fed does next. Cyclicals showing signs of pause and investors looking for defensive/quality names.

Data was unexciting: Initial jobless claims were steady at 353k, a modest increase from the 349k last week, whilst the second reading for GDP in Q2 showed the US economy grew by 6.6%.

It’s all about today’s Jackson Hole event – lots of talk but ultimately, it’s going to come down to whether Powell talks up the taper or talks it down. Yesterday among the various ‘sideline’ chats, Dallas Fed president Robert Kaplan didn’t say anything new – he expects to taper this year and hike next year but stressed the two decisions are entirely separate. James Bullard and Esther George also reiterated their view that the taper should start sooner rather than later. All three are on the hawkish end of the committee so this is not that big a deal or anything we didn’t know already. What matters ultimately is what Powell, Williams and Clarida think.

Away from Jackson Hole we have some actual data that is important – the core PCE price index, which as well know is the Fed’s preferred measure of inflation. It’s expected to rise 0.3% month-on-month in July, easing from the +0.4% in June. Last month’s annual print showed inflation excluding energy and food rose at +3.5%, the fastest pace in 30 years. PCE including those more volatile elements rose 4%, the most since 2008.

Stagflation: German import prices rose 15% in July – the fastest clip in 40 years. The increase, the highest year-on-year-change since September 1981, increase from +12.9% in June and +11.8% in May. Excluding the energy component, prices rose 9%.

Peloton shares tumbled in after-hours trade after it reported a wider fourth-quarter loss and issued disappointing guidance. PTON reported a loss per share of $1.05 vs $0.45 expected as revenue growth hit the front brakes in the fourth quarter. This was partly due to the recall of its treadmills. Meanwhile it’s also cutting the cost of its Bike product by 20%. Stock is now –21% YTD as the wheels have come off this particular ‘Covid winner’. Interesting to look across the pond to our own Covid winners – Ocado is –12% YTD and JustEat –20%.

The dollar is a tad weaker, and we note that DXY has twice failed to break above 93.15 area on the hourly chart. Could retest bottom of the channel at 92.83. Breach here could up downside with a clear path to 91.80.

Dollar Index 27.08.2021

Gold: more solid footing as $1,800 is recaptured – next leg up depends on how dovish Powell sounds in the face of all this inflation.

Gold Chart 27.08.2021

Oil: Spot WTI regaining the trend line just and back above the 100-day SMA with the bullish MACD crossover confirmed.

Spot Oil Chart 27.08.2021

Can oil hit $100 this year?

Commodities

Oil is undergoing a sustained rally. Reaching highs not seen since the start of the pandemic, key contracts are on an upward trajectory. Is it sustainable? Will we see an $100 oil price in 2021?

Oil trading

Oil prices retreated slightly on Monday morning from the previous week’s highs, but as of Tuesday growth was back on the cards.

WTI was trading at $72.90, while Brent contracts were being exchanged for $74.81. These are some of the highest levels seen in oil since before the Covid-19 pandemic took hold.

While $80 is the target, especially from Goldman Sachs, some bullish commentators and traders are eyeing up a potential $100 oil price in 2021.
What was unthinkable at the start of the year, is now not outside of the realms of possibility. Many traders and market analysts are taking an ultra-bullish stance.

Lots of factors are at play here. Firstly, OPEC+ has firm control over global oil supplies. Its gradual reintroduction of more crude onto global markets has supported oil prices across 2021 so far. The cartel is keen not to fully open the taps until pre-pandemic oil demand is back.

Goldman Sachs’ oil outlook suggests oil demand will return to normal levels by Q4 2021, feeding into the bullish feeling. A delay in the Iran-US nuclear deal is keeping 1m bpd out of circulation, again supporting prices.

A dramatic drawdown was reported by the EIA in its inventories review for week ending June 11th. Stocks decreased by 7.4m barrels at the end of the review period – highlighting the US’ increasing thirst for crude.

Despite this, OPEC is confident US oil output growth will remain subdued for the rest of the year, even though the US rig count is up to 373 – the highest level since April 2020, according to Baker Hughes.

Natural gas trading

Scorching temperatures across the southern US and California were forecast to support natural gas prices at the start of the week as cooling demand season hits. In fact, reports from Texas and California suggest gas use spiked as homeowners and businesses cranked their AC to counter intense heat.

As of Monday, a tropical storm was brewing in the Gulf of Mexico which may threaten LNG infrastructure and export activity in Louisiana and create bearish conditions in that region.

Total gas stocks stand at 2.427 Tcf, down 453 Bcf from a year ago and 126 Bcf below the five-year average, according to the EIA natural gas storage inventories report for week ending June 11th.

From this, natural gas temperatures remain around the $3.22 level. Cooling season is a transitionary period for gas use, so expect to see fluctuations on prices throughout the hotter summer seasons and into autumn.

Week Ahead: NFPs, OPEC & PMIs

Week Ahead

OPEC+ meets this week against a backdrop of weaker oil prices. Nonfarm payroll data is released too. Will we see another strong month or is February’s surge a one-off? Meanwhile, the US and China square off in the manufacturing sphere with key PMI releases. Deliveroo, one of the UK’s most hotly anticipated IPOs, goes live too. 

OPEC+ meeting – more cuts or staying the course? 

Supporting oil prices throughout the lockdown and return normalcy has always been top of OPEC’s agenda. This will take on renewed importance in April’s meeting, as crude oil prices have dropped down from their $70 high over the past couple of weeks. 

At the time of writing, prices had risen off a six-week low despite the EIA reporting higher than expected storage volumes at US warehouses. WTI is trading about $60 with Brent at $63. 

Cuts are very likely to stay in place. OPEC and allies have taken 7% of pre-pandemic supply out of circulation, and chair Saudi Arabia has committed to a further 1m bpd cut. 

However, there is an EU-shaped spanner in the works.  

Vaccine rollout, or lack thereof, in Europe has also put pressure on oil prices. Politically motivated supply tussles, and now more questions around the AstraZeneca vaccine’s effectiveness, have all conspired to impact oil demand as speculators unwound long positions they had booked on higher summer travel demand. 

Vaccine uptake coupled with a fresh wave of new Covid-19 cases across Europe has resulted in tighter lockdowns. France and Germany, for example, have announced more restrictions, as has Poland. The UK has also said it has had to slow is own vaccine programme, one of the best in the world, due to vaccine supply pressure. 

For the second quarter of 2021, the EIA sees Brent prices averaging $64 per barrel and then averaging $58 a barrel in the second half of 2021, as it expects downward price pressures will emerge in the coming months as the oil market becomes more balanced.  

OPEC’s next move will be crucial if it wants to help support its members through better prices in 2021. 

US nonfarm payrolls – all eyes on labour market after February surge 

US nonfarm payrolls are released on Friday. Following February’s blowout month, the market will be watching March’s report intensely, hoping to pick up more signals that the US is quickly returning to economic health. 

 Payrolls surged 379,000 in February, smashing expectations of 210,000 and edging down the unemployment rate to 6.2%.  

The battered leisure and hospitality sector showed the lion’s share of new payrolls, with 355,000 added in February. While this encompasses cinemas, hotels, museums, resorts and amusement parts, it was food service that propped up the leisure and hospitality industry in terms of new jobs added, with 285,900. 

 Biden’s stimulus deal is likely supportive of new job creation. As part of the President’s $1.9 trillion  package, small businesses are receiving further support in order to a) support existing jobs and b) possibly lead to new hires or rehires. This includes: $25bn for restaurants and bars; $15bn for airlines and another $8bn for airports; $30bn for transit; $1.5bn for Amtrak and $3bn for aerospace manufacturing. 

Because of the stimulus package, other companies have halted lay off programmes. United Airlines, for instance, had scheduled 14,000 layoffs in February. According to a Washington Times report, this has been cancelled with extra government money flooding into United’s coffers. 

Local transport authorities, especially the Metropolitan Transportation Authority of New York, will be receiving billions, allowing them to protect jobs. New York will be receiving $6bn, for example, so it can stop layoffs and service cuts. 

Of course, this is mostly about protecting existing jobs. It will be interesting to see what effect that has on nonfarm payrolls for March. If SMEs are anticipating more government funds, that may then feed into increased payroll numbers, as their finances may allow recruitment to kick off again. 

US & China Manufacturing PMI 

The two global economic titans reveal their latest manufacturing PMI data in the week ahead. 

Starting with the US, we’ve already seen IHS Markit’s US manufacturing PMI for March, showing another strong month for the country’s factory output. This edged higher to 59 in March from 58.6 in February, implying  activity in the manufacturing sector continued to expand at a robust pace. This reading came in slightly lower than the market expectation of 59.3, but nothing to really fret about. 

We’re waiting for the Institute of Supply Management (ISM) PMI data in the week ahead. February’s was a blockbuster month for manufacturing, according to ISM, with the PMI reaching a three-year high of 60.8. If we take the IHS data as an indicator, then we’ll probably be looking at steady expansion, rather than another massive surge has seen in February. Still, encouraging signals for factory production levels throughout the US. 

The US’ economy has been in a healthier state since the new year. Stimulus put more money into consumers’ pockets, and we already know more is coming. Being able to pump that liquidity back into the economy may be why manufacturing is in such a good place. Vaccine rollout isn’t bad in the US either, which is also underpinning renewed confidence throughout the country. 

On the other hand, Chinese output slowed in February, according to the March release of the Caixin PMI, the country’s key factory productivity tracker. Could we see the slowdown continue in April? 

According to the last Caixin PMI, the index fell from January’s 51.5 reading to 50.9 in February – the lowest for 9 months. A reading above 50 still indicates growth, but the fact its dropping suggests a retraction. 

Why so? Domestic Covid-19 flair ups and slowing global demand for imported Chinese goods put a strain on China’s manufacturing centre. Factories also laid off workers and were in no hurry to fill their vacancies.  

Analysts still expect a strong year for China, as it was one of the few countries to show any real economic growth during 2020 at the height of the pandemic. However, February’s manufacturing slowdown highlights some fragility in the ongoing Chinese economic recovery. We’ll get a clearer picture when March’s PMI is released. 

Deliveroo IPO – save the date 

Deliveroo launches its IPO on March 31st, although unrestricted trading will not be available until April 7th 

Deliveroo has set a price range for its shares of between £3.90 and £4.60 per share, implying an estimated market capitalisation of between £7.6 billion and £8.8 billion.  

The company will issue 384,615,384 shares (excluding any over-allotment shares) and expects to raise £1bn from its IPO. Even at the lowest end of the range, it would be the largest listing in London for a decade and Europe’s largest this year.  

Amazon has a 15.8% stake in the company, but it plans to sell 23,302,240 shares for between £90.8 million and £107.2 million, depending on where the IPO prices. Chief executive and founder Will Shu will sell 6.7m shares, leaving him a remaining stake of 6.2% of the company, worth around £500m. 

Major economic data 

Date  Time (GMT)  Currency  Event 
Tue 30 Mar  3.00pm  USD  CB Consumer Confidence 
       
Wed 31 Mar  2.00am  CNH  Manufacturing PMI 
  1.15pm  USD  ADP Nonfarm Employment Change 
  1.30pm  CAD  GDP m/m 
  3.30pm  USD  US Crude Oil Inventories 
       
Thu 1 Apr  All Day  All  OPEC+ Meetings 
  3.00pm  USD  ISM Manufacturing PMI 
  3.30pm  USD  US Natural Gas Inventories 
       
Fri 2 Apr  1.30pm  USD  Average Hourly Earnings m/m 
  1.30pm  USD  Nonfarm Employment Change 
  1.30pm  USD  Unemployment Rate 

 

Key earnings data 

Date  Company  Event 
Mon 29 Mar  Sinopec  Q4 2020 Earnings 
     
Tue 30 Mar  Bank of China  Q4 2020 Earnings 
  Carnival  Q1 2021 Earnings 
     
Wed 31 Mar  Micron  Q2 2021 Earnings 
  Walgreens  Q2 2021 Earnings 

Oil prices strengthen as supplies tighten while natural gas heats up in intense cold

Cold sweeping through the US has been good for natural gas, whilst its also put a support under oil prices. But OPEC faces some tough talks when it meets next month. 

Oil trading 

Prices are stronger again, with WTI and Brent trading above $62 and $64 at the time of writing. It appears the tightening of supply, caused by a big freeze hitting much of the US Texas-based refinery infrastructure, has put a tightening on supply. Is this behind the latest price strengthening? 

There are also some indicators that demand may be picking up again in the US. The EIA reported a 7.9m barrel drawdown during the week of its last report. At 461.8 million barrels, US crude oil stocks are now at their five-year average for this time of year, which suggests the US oil market may be beginning to realign and show some semblance of normality. 

Recovery is still likely to be slow. But there are hopes, globally, that oil-heavy sectors will kick on soon. The UK just released its roadmap for navigating out of lockdown. It’s optimistic all social restrictions could be lifted by June, so airline stocks rallied a little on the news. Could that transfer into higher UK oil demand? Will other European countries follow suit? It depends if they can get their vaccination programmes in order. 

There’s also the incoming $1.9 trillion in US stimulus coming that we’ve touched on before. 

While stronger prices should be great news for OPEC and allies, there’s a split emerging once again as the cartel having to decide to keep production cuts flat or taper them in April. 

Saudi Arabia, OPEC’s top producer and de facto leader, is favouring keep production cuts as they are. As it stands, OPEC has removed 7m barrels per day from daily output across its members, equating to about 7% of worldwide supply. Saudi Arabia voluntarily cut its own production further by 1m barrels. 

But then there is Russia. Last week, former Russian Energy Minister and current Deputy Prime Minister Alexander Novak said the oil market had “re-balanced” itself. No prizes for guessing which direction Russia wants production cuts to take going forward. 

Saudi Arabia had previously announced it will remove its own voluntary cuts, separate from the OPEC agreement, in April, but the clash between it and Russia will colour the next OPEC on March 4th 

Natural Gas trading 

The freezing temperatures sweeping across the US and down into Texas have lit a fire under natural gas prices. They rose 5% across the last week, as the frigid conditions continued. Much of the US natural gas production capabilities is in Texas and has been shuttered as the state continues to deal with the cold as best it cans. Supply may have tightened as a result. 

Inventories decreased 237 Bcf in the last review period, according to the EIA, but still sit above the five-year average of 2,224 Bcf, totalling 2,518 Bcf.  

Temperatures are also starting to warm in Central US, which may put limits on both price action and demand. Can prices remain high? Spring is coming, which will possibly put a bit of a dampener on price action going forward. 

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