Can crude oil prices make it to the triple digits this year?

Commodities

Oil prices are mounting a strong upward charge as the natural gas crisis rolls on. The question is how far can oil go?

Oil trading

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.

Slow start for equities, Asos tumbles

Morning Note

Soft and sluggish start for European equity markets – typical Monday morning feel until we all get out of bed. FTSE 100 is out the traps better at +0.2%, with banks, basic resources and oil & gas leading the way higher this morning, DAX lower at -0.3%. Rates are up – US 10yr Treasury note north of 1.6% and 2s and 5s highest since around March 2020. Last week’s nonfarm payrolls missed expectations, but Fed chair Powell says it’s about accumulated progress, not a blowout month. After the first flush of summer and two very strong prints, jobs growth is slowing and wages are up sharply at 4.6% – the stagflation bears may point out. US stocks froze somewhat in the headlights of the miss, declining mildly on Friday but nevertheless posting a positive week. The S&P 500 posted its best since August, the Dow Jones its strongest since June.

US and inflation on deck this week will be the focus, but so too earnings season as it gets underway on Wall Street. Earnings on tap this week include JPMorgan Chase, Goldman Sachs, Bank of America, Morgan Stanley, Wells Fargo, Citigroup, Delta Airlines and Walgreens Boots Alliance.

As mentioned a couple of times last week, the question facing investors is whether earnings calls are positive – supply chain woes, labour shortages, etc etc. And this takes us to the point also made last week – are we at peak inflation/stagflation/supply chain fear? The macro outlook still seems somewhat cloudy in terms of growth, policy and inflation, but that does not mean equities cannot make gains – climb the wall of worry, as the saying goes. Indeed, there are signs that some of the worst of the container shipping problems are rolling over. The stagflation shadow may be around for a while, but this may now be fully ‘priced’. What we don’t know is whether equities – particularly US and megacap growth which has dominated and is now a large part of the S&P 500 by weighting – will roll over as the Fed starts to taper and we see rates move higher. Whilst it has been choppy and volatile, so far the move to 1.6% on 10s from the August lows at 1.17% has not produced panic. Since peaking in early September, the broad market is down ~3%, whilst the Nasdaq 100 is about 6% lower. Not without damage, for sure, but the move has been fairly orderly, rotational, and is seen has a ‘healthy’ type of correction that is generally supportive for equities in the longer run.

Of course, don’t expect companies to waste a good crisis. Remember the warnings due to Covid that generally turned out to be fake news. This quarter’s earnings schedule should feature some pretty heavy expectation management that may create good opportunities for entry points. Corporate sandbagging might weigh on individual names temporarily though the broad market should be able to withstand this.

Asos shares tumbled this morning as CEO Nick Beighton steps down and the company warned of continued supply chain problems. Revenues also missed expectations, but undoubtedly the departure of Beighton, who has steered the company through an incredible period of growth, is a contributing factor. A big loss for the company. The search is on for a successor who can deliver £7bn of annual revenue within the next 3 to 4 years. Annual results were impressive with sales growth of +22% and profits +36%, but expectations for the next year are being massaged down to 10-15% with first half sales in mid-single digits. Asos is not wasting this supply chain crisis to lower the bar. Zalando down more than 3% in sympathy.

Energy markets remain in sharp focus with all-time highs for Chinese coal echoing loudly this morning. Nat gas is steady around $5.70, though European prices remain volatile. Oil is higher again with WTI north of $81. Declining inventories, supply kept in check, demand recovering post the big summer Delta wave fear = bullish for oil. CFTC data shows speculators getting longer oil.

Oil Chart 11.10.2021

Sterling on the move: GBPUSD has broken resistance and cleared the recent range to reach its best level in two weeks. The pair has broken out to 1.3670 in early trade this morning with a clear bullish bias having cleared out the ranges. Sterling is firmer thanks to increased speculation the Bank of England will raise rates sooner than previously expected. MPC member Michael Saunders said households should prepare for “significantly earlier” interest rate rises as inflation pressure rises – though he didn’t necessarily signal that November is on the table. Remember markets were pricing for Feb hike of 25bps and Saunders said that “markets have priced in over the last few months an earlier rise in Bank Rate than previously and I think that’s appropriate”. This morning the money markets have brought this forward to Dec – arguably on Saunders remarks, arguably were heading that way anyway. We should note that Saunders is on the hawkish end of the committee and voted to halt the BoE’s bond buying programme early.

GBPUSD: MACD bullish crossover, just now running into trend resistance.

GBPUSD Chart 11.10.2021

Bitcoin: momentum positive but pulling back at $57k, the 78.6% retracement.

Bitcoin Chart 11.10.2021

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.

Oil & gas stage major surge

Commodities

Crude oil and natural gas are off to a flying start this week with market conditions perfectly aligning to create strong price action.

Oil trading

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

Commodities

Key benchmarks have dropped from highs seen last week while natural gas, while dipping, is still strong.

Oil trading

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.

OPEC+ preview: Delta dawn to delay production cuts sunset?

Commodities
  • OPEC+ expected to maintain slow increase in production
  • WTI & Brent trade close to three-year highs
  • EIA inventory report shows further tightening

The Organisation of Petroleum Exporting Countries and its allies (OPEC+) convene on Thursday, July 1st to discuss the next phase of production constraints. The cartel is already increasing output by 2.1m bpd from May through to July and has successfully carried off this increase whilst still presiding over rising prices. The focus on the meeting is whether to maintain this gradual easing of production curbs in August and potentially beyond. Market expectations suggest OPEC+ will increase output by around 500k bpd in August but there are still plenty of unknowns.

On Wednesday, OPEC secretary general maintained a bullish outlook for oil demand recovery this year but pointed to risks on the horizon. He said that while OECD oil stocks are now below the 2015-2019 average, significant uncertainty in oil markets calls for prudence, highlighting the considerable risk to demand outlook from Covid variants.

Demand recovery is uncertain. Whilst US air travel passenger numbers are almost back to 2019 levels, and German diesel demand has recovered to pre-pandemic levels, there are clearly risks that the spread of variants like Delta around the globe will constrain or delay the pick-up in demand that has generally been expected to take place this year. Delta keeps OPEC mindful of being too loose and suggests it might err on the side of less production for the time being – particularly as so much of this year’s demand is seen returning in the second half (see below).

E.g., Japanese oil demand is still pretty soft with consumption in May down 8.5% vs 2019. It highlights that outside of China, a combination of relatively low vaccination rates and the Delta variant continue to weigh on local crude demand.

Nevertheless, OPEC is unlikely to have to contend with a surge of Iranian oil imports onto the market as progress on the nuclear deal to lift sanctions is slow, with talks delayed, and may never happen. Meanwhile US production has not recovered as quickly as one might have thought – the rig count is higher at 470 but well below the ~800 before the pandemic.

Barkindo said global oil demand should rise 6m bpd in 2021, with 5bpd of that figure due to arrive in H2. This presents a risk that oil demand recovery is weighted to the second half of the year and may not emerge due to new restrictions on mobility in response to new waves of the virus. This could leave OPEC+ unwilling to ease of restraints as much as the market thinks it will. On the other hand, there is evidence the market is increasingly tight and OPEC may prefer to ease off a touch to loosen it. Goldman Sachs reckons global demand will rise by an additional 2.2m bpd by the end of 2021, which would leave a 5m bpd supply shortfall. “Ultimately, much more OPEC+ supply will be needed to balance the oil market by 2022,” the bank said in a note.

An internal OPEC report seen by Reuters indicates the cartel is worried the market will return to surplus after the self-imposed output curbs end in April 2022. This could lead to discussion about extending supply cuts beyond that date. An extension would pick up the back end of the curve, which is looking a bit tired, and net would be considered bullish for prices, but could be offset by a larger-than-expected increase in the near-term to compensate some members.

Prices have rallied strongly this year, but members of the cartel need even higher crude prices. The OPEC average fiscal breakeven oil prices stand at $93, according to RBC, which thinks OPEC+ could add anything from 500k bpd to 1m bpd in August.

EIA weekly report

Ahead of the meeting, the latest EIA report today shows a continued draw on inventories. Stockpiles declined by 6.7m barrels, vs the estimated draw of 3.8m, supported by a net 500k bpd decline in imports and a 200k bpd increase in refinery demand. Total products supplied over the last four-week period averaged 20.0 million barrels a day, up by 13.3% from the same period last year.

US commercial crude oil inventories decreased by 6.7 million barrels in the week to Jun 25th from the previous week, yet another weekly draw that leaves inventories at their lowest since March 2020. At 452.3 million barrels, inventories are about 6% below the five-year average for this time of year. Total motor gasoline inventories increased by 1.5 million barrels, whilst distillates fell by 900k.

WTI price action

Post the EIA report it’s pretty much as you were with all eyes on OPEC+. As we flagged in Tuesday’s morning note, there is something of a technical hitch for oil. So far this market has been a buy-the-dip affair as WTI edged up above $74 this week to its highest in almost three years, moving close to a 6-year high in the mid-70s; and market fundamentals are solid as supply remains tight. But Monday’s outside day bearish engulfing candle is a potential red flag, while the bearish MACD crossover on the daily chart is another. RSI bearish divergence is a third with a higher high on the price met by a lower high on the 14-day RSI, indicating buyer exhaustion. This is not necessarily the top but would call for a potential near-term pullback such as a ~10% correction as seen in Mar/Apr this year.

500k bpd is the baseline – go beyond that to 750k, 1m then it’s a bearish reaction in the market. Go under and it’s bullish. But these would be only the immediate responses and market fundamentals remain positive even with more crude coming on stream. Technicals are less inclined to support the bullish outlook in the immediate near-term sense. A temporary pullback would allow for the bulls to take a breath before resuming the uptrend.

Crude oil price action chart ahead of OPEC+ July meeting.

Oil dips ahead of OPEC+ meeting

Commodities

The oil rally has hit resistance as OPEC and allies prepare to meet for another crucial conference.

Oil trading

Despite starting the week strongly with WTI and Brent trading above $74 and $75 respectively, the oil rally looks like it’s lost a bit of traction today.

WTI prices are now floating around the $73.00 level. Brent contracts are, at the time of writing, trading for around $73.77.

OPEC JMMC’s July meeting takes place on Thursday over a background of rising Asian Covid-19 cases. The Indian delta variant continues its spread, as tensions mount regarding lockdowns and case numbers throughout Asia. Demand recovery in this geography may take longer to get going as a result.

In terms of OPEC+, forecasts suggest the cartel will acquiesce to raising output volumes in line with rising global crude demand. Its expected OPEC+ will bring 500-550,000 bpd back onto global markets from the end of July onwards.

However, OPEC’s latest forecast models suggest this may not be enough. OPEC+’s output may fall short of expected demand by 1.5m bpd in August, according to the cartel, widening to 2.2m bpd by Q4 2021.

Dubai’s ADNOC, a key OPEC member, has already stated it will be dropping export volumes by 15% in September. There is no indicator as to why ADNOC has decided to announce this cut, especially ahead of an OPEC JMMC meeting where higher output is forecast.

If OPEC’s predictions are correct, however, that does give its members space to increase production volumes. But there’s the problem of Iran to contend with.

OPEC members are watching the ongoing Iranian-US nuclear deal talks closely. Iran pumped 2.5m bpd in May 2021. Prior to tighter US sanctions, it was pumping over 3.8m bpd. Adding the 1.3m bpd to global supplies would give OPEC+ less room to increase its own output without tipping towards a market surplus.

However, no breakthrough has been made between Iran and its negotiating partner yet.

On a more positive note, jet fuel is slowly recovering. As of Monday 28th June, worldwide air travel capacity had reached 62% of 2019’s total. The US has been whitelisted by the EU for inbound tourism, while the UK has added several popular tourist destinations, like Ibiza and Malaga, to its quarantine-free green list.

On the infrastructure front, 19 US oil & gas pipeline projects are nearing completion this year. This includes brand new petroleum pipelines, as well as upgrades and overhauls to existing pipework.

The total North American rig count, incorporating US, Canadian and Gulf of Mexico sites, is 587 – some 318 higher than this time last year.

As per the EIA’s storage report for week ending June 18th, US commercial crude oil inventories decreased by 7.6 million barrels from the previous week. At 459.1 million barrels, crude oil inventories are about 6% below the five year average for this time of year. Total motor gasoline inventories decreased by 2.9 million barrels last week and are about 1% below the five-year average.

Natural gas trading

Natural gas started the week on a bullish footing after gaining 8.5% in the previous seven days. On Monday, the $3.50 level had been breached as prices hit highs not seen since November 2020.

Hot temperatures are forecast to sweep across the US, creating higher overall demand as heat builds towards the weekend. Expect to see more demand for cooling gas to offset losses in gas-for-power consumption, as per Natural Gas weather.

As well as the weather, higher natural gas exports may also support prices going forward. Natural gas exports to Mexico jumped 3% last week to 7.0 Bcf per day – new weekly average record for Mexico-bound US gas exports.

Working gas in storage was 2,482 Bcf as of Friday, June 18, 2021, according to EIA estimates. This represents a net increase of 55 Bcf from the previous week. Stocks were 513 Bcf less than last year currently and 154 Bcf below the five-year average of 2,636 Bcf. At 2,482 Bcf, total working gas is within the five-year historical range.

On the infrastructure front, 19 US oil & gas pipeline projects are nearing completion this year. Seven of the total number of pipelines are for gas, representing a mixture of new lines or upgrades to existing infrastructure. This has helped improve transportation from key production hubs to export or transmission terminals and could also support prices going forward.

Travel stocks rally, China PPI shrugged off for now

Morning Note

European markets opened mixed but broadly remain calm as they have for the whole week. Everyone’s waiting for signals on inflation – investors seem to be largely shrugging one from China today. Having led the way higher yesterday, the FTSE 100 is weaker today, whilst European indices are just in the green as they chop sideways ahead of tomorrow’s ECB and US CPI double-header. The Tiggerish outgoing chief economist of the Bank of England, Andy Haldane, said this morning that the UK economy is going gang-busters and inflation pressures are strong.

 

It was a mixed bag over the US in yesterday’s session as the Dow slipped a modest 30pts, the S&P 500 stayed flat as it struggles to make a new all-time high, and the Nasdaq rose 0.3%. The S&P 500 rose by less than 1pt to 4,227.26, a whisker below the record 4,238.04 reached on May 7th. 10yr Treasury yields slipped to 1.513%, the lowest level in a month. Remember payrolls data last week showed strong but not too strong job creation – enough to keep tapering talk at bay, or at least so the market seems to think. Yesterday’s huge JOLTS jobs openings report highlighted that the US economy is booming but a shortage of the right labour in the right places could a) force up wages and b) restrain growth (stagflation?). But, in the words of Mario Draghi, this is a ‘high class’ problem to have.

 

China’s producer price index, a key leading indicator of global inflation, rose at its fastest pace in 13 years as base effects from last year’s pandemic and a boom in commodity prices fed into higher prices paid by businesses. PPI in China rose at 9% in May, the highest it’s been since 2008, and a signal that inflationary pressures are not going away soon. It’s not a major surprise – expectations were for 8.5%: we know inflation is here right now. The question remains about the degree to which this is a transitory force or a lasting shift. There is another question: can companies pass these on to the consumer? If so, it runs the risk of stagflation; if not it could means slowing earnings growth. Does this favour the value trade still? We’ve seen a big rotation already, but growth and inflation this year ought to continue to be supportive. Cathie Wood of Ark thinks otherwise. “The rotation back to growth is probably close at hand,” she said at an Ark Invest webinar on Tuesday.  

 

Travel stocks popped up a touch on news the EU parliament has approved vaccine passports to ease travel this summer. We saw the likes of TUI, IAG, EasyJet and Ryanair all jump as the news broke on the wires. WH Smith also ticked higher, dependent as it is now on travel sales. SSP, the operator of food and beverage outlets in travel locations worldwide, should also be pleased. It reported a £300m loss this morning as revenues declined by almost 80%. Management say they don’t think sales will return to pre-Covid levels until 2024. Shares dropped at the open on the big loss but turned higher as the EU travel news broke. Meanwhile, the US eased travel restrictions for 61 countries, but not the UK. Nevertheless, there is a real sense that vaccines are working to open up the US, EU and UK to travel this summer, albeit not quite how it once was.

Oil pushed to fresh highs ahead of the EIA inventory report later and tomorrow’s OPEC monthly report. WTI drove on beyond $70 to mark an almost-three-year high overnight amid encouraging signs of demand recovery. Meanwhile fears of Iranian supply hitting the market later this year subsided after the US secretary of state Anthony Blinken said hundreds of sanctions would remain on the regime in Tehran, even if the two countries reach a nuclear deal. Whilst vaccines and the reopening of economies have left the market in deficit, helping to drive prices up 35% this year, the persistence of cases in some parts of the world combined with ongoing travel restrictions in Europe/US means there are still doubts about how quickly demand will recover this year.  Nevertheless, prices hit their highest since Oct 2018 after the API reported a draw of 2.1m barrels last week. 

Thursday sees the release of the latest OPEC monthly oil market report.  Last month’s report saw the cartel reiterate its belief in a strong recovery in world oil demand in the second half of 2021. This month’s report is not expected to show much change from the previous version, which said demand will rise by 5.95m bpd this year, up 6.6% from 2020 levels. Ahead of this, traders will look to today’s inventory report from the Energy Information Administration (EIA). Last week’s EIA inventory report showed stockpiles declined by 5.1m barrels, a larger-than-expected draw that helped to support the bullish view on oil prices as demand in the US recovers. Analysts expect a draw of 3.3m barrels to be posted today.

Elsewhere, Bitcoin trades at $34k after touching $31k yesterday. A SEC official expressed concern about the US financial regulator’s push to enforce stricter rules around cryptos. GBPUSD continues to hold below 1.42, but a breakout of the triangle to the upside needs to be monitored with MACD (1hr) crossover still supportive of a nudge up to 1.42 – failure at 1.4180 could beget a drop to the 1.4120 area.

Oil runs into resistance at $70 ahead of OPEC, inventory reports

Oil tested big resistance at $70 this week as prices hit their highest since before the pandemic, however a lack of momentum has seen WTI ease back ahead of the OPEC monthly report this week and the usual EIA crude oil inventories report. 

Three-year high for WTI

WTI and Brent contracts rose sharply last week to make new highs as OPEC+ stuck to its plan to only slowly raise the level of output through to July. Whilst vaccines and the reopening of economies have left the market in deficit, helping to drive prices up 35% this year, the persistence of cases in some parts of the world combined with ongoing travel restrictions in Europe/US means there are still doubts about how quickly demand will recover this year.  

Nevertheless, prices hit their highest in almost three years on Monday as the situation in India in terms of covid cases seemed to improve, whilst the post-OPEC bounce held firm. 

Thursday sees the release of the latest OPEC monthly oil market report.  Last month’s report saw the cartel reiterate its belief in a strong recovery in world oil demand in the second half of 2021. This month’s report is not expected to show much change from the previous version, which said demand will rise by 5.95m bpd this year, up 6.6% from 2020 levels. 

Ahead of this, traders will look to Wednesday’s inventory report from the Energy Information Administration (EIA). Last week’s EIA inventory report showed stockpiles declined by 5.1m barrels, a larger-than-expected draw that helped to support the bullish view on oil prices as demand in the US recovers.  

OPEC in control? 

The world’s largest oil trader said this week that the US has handed back control of the oil market to rivals. 

OPEC+ seem to have the handle on crude prices as S. production has failed to catch up to pre-pandemic levels, Mike Muller, Vitol’s head of Asia, said at an online conference. “There’s a perception in the market that control is with OPEC+,” Muller said at the Gulf Intelligence event. “It will take a long time for US oil to come back.” 

Meanwhile traders are also eyeing Iranian oil coming back on stream as a potential nuclear deal moves tentatively closer.  

Colonial Pipeline shutdown puts the squeeze on US

Commodities

The Colonial Pipeline cyberattack grabs the headlines, causing headaches and supply blocks in the US.

Oil trading

Oil’s main event this week has been the shutting of the US’ Colonial Pipeline thanks to a ransomware attack by cyber-terrorist group DarkSide.

A vital artery in supplying petroleum products, the pipeline came under cyberattack at the tail end of last week, shutting off 2.5m Bpd of US East Coast oil supplies.

Oil prices initially made gains after the pipeline’s closure. At the start of the week, WTI was trading above $65 while Brent was above $68.50 and closing in on $69. At the time of writing, however, both blends had retreated to $63 and $66 respectively – a reversal anticipated by traders thanks to refinery supply bottlenecks.

While the cyberattack has reportedly been resolved, the aftershocks are still reverberating. It will still take a few days to get the pipeline pumping again. Congress has passed an emergency waiver to transport oil products via road, but this is unlikely to satiate the East Coast’s commercial and industrial oil appetite.

The short term consequences are:

  • Lower fuel stocks
  • Higher fuel prices – an initial 2-3% rise could get higher
  • Less crude throughput at refineries dropping output

It will be interesting to see if the attack has any long term effect on petroleum deliveries. According to the EIA storage report for the week ending April 30th, total products supplied over the last four-week period averaged 19.8 million barrels a day, up by 34.2% from the same period last year. Motor gasoline deliveries were 56.2% higher than a year ago.

US commercial crude oil inventories fell by 8.0 million barrels from the previous week. At 485.1 million barrels, U.S. crude oil inventories are about 2% below the five year average for this time of year.

In more positive news, UK fuel sales have soared with lockdown easing. As of the week ended March 7th, they were at the highest level since March 2020. Vaccine rollout has been massively successful in the UK. The nation’s economy is set to rebound significantly across 2021 while navigating out of lockdown. Increased freedom of movement is proving positive for fuel demand.

OPEC+ output jumped in April too. The cartel’s crude oil production is estimated to have increased to a three-month high of 24.96 million barrels per day (bpd) last month. A major leap in Iran’s output, according to an Argus survey, was behind the increase.

The cartel is expected to begin improving monthly output from May onwards in response to improved market conditions.

Natural gas trading

Short term weather patterns suggesting a cooling off in the Midwest, Plains and Northwest regions, possibly leading to higher natural gas demand for heating and commercial use there. Cooler temperatures may swing into the south and Texas too, which could help support prices.

The EIA’s latest natural gas inventories report for the week ending April 30th shows that domestic supplies of natural gas rose by 60 Bcf. Total stocks now stand at 1.958 trillion cubic feet – down 345 Bcf from a year ago and 61 Bcf below the five-year average.

LNG demand is also a key driver of natural gas price movement. Rising demand from Europe, Asia and Mexico is great news for US gas suppliers, which should play into heightened feed gas volumes at Texan infrastructure.

Current higher LNG feed gas levels in Texas can be attributed to exports, but the February big freeze could also be playing a part. During that time, when the majority of production and liquefaction facilities were under ice, causing the largest monthly drop in monthly output on record.

US natural gas production in February 2021—measured by gross withdrawals—averaged 104.8 Bcf/d. This was 8.1 Bcf/d, or a 7% month-on-month decline.

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