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Has OPEC’s belief that a $70 oil price will not lead to a US shale oil boom paid off? Elsewhere, changing weather patterns set the tone for natural gas markets going forward. 

Oil trading 

WTI is trading around $64 this morning, with Brent at the $68 mark. A couple of weeks ago, Brent had breached $70, which, while good on paper, actually caused some shaky knees throughout OPEC.  

The cartel’s current mission statement is to support prices through production cuts. The $70 Brent price, however, appeared like a green light for US shale to start bumping up production. If that was the case, with more oil entering the markets, then it’s logical that prices would drop, as demand would not balance with increased supply. 

$70 was quite a gamble for OPEC+. Luckily for them, it seems to have paid off. US shale oil producers instead continue to practice capital responsibility, instead of chasing higher production volumes to capitalise on higher prices. 

OPEC’s production cut strategy is likely to remain the key support for oil prices going forward. At its meeting last week, the cartel committed to keeping its production cuts static. Saudi Arabia also confirmed it would be keeping its voluntary 1m bpd cut in place too. 

US shale firms with no production outside America are forecast to raise production modestly in h2 2021, according to Bloomberg Intelligence Data, with levels rising from 6.5m bpd in 2020 to 7.2m bpd in 2021. 

JPMorgan expects U.S. oil output to average 11.36 million barrels per day this year compared to 11.32 million bpd in 2020. 

For the US market, it looks like gasoline is the key focus for the rest of the year. RBC Capital said fundamentals for summer gasoline are “almost bullish”. Stocks dropped at last EIA report printing for week commencing March 5th, 2021. Motor gasoline inventories decreased by 11.9 million barrels and were about 6% below the five-year average for this time of year. 

A $4 per gallon gasoline price may be coming to the US by the summer. A supply squeeze coupled against higher demand, as lockdown eases thanks to US vaccine rollout, which could cause gasoline prices to accelerate. 

Total US commercial crude oil inventories increased by 13.8 million barrels from the previous week, according to latest EIA data. At 498.4 million barrels, U.S. crude oil inventories were about 6% above the fiveyear average for this time of year. 

Natural gas trading 

Cold weather systems are making their way through the central US states right now and could start hitting the Northeast very soon. But natural gas traders live in a world a fortnight ahead of everyone else, and the forecasts suggest warmer temps will blunt current weather’s impact. We could be seeing lower demand in key states as a result, leading to a bearish EIA storage report. 

Latest printing showed a 52 Bcf drawdown with stocks ending the period at 1,793 Bcf, compared with the year-earlier of 2,050 Bcf and the five-year average of 1,934 Bcf. Stocks are likely lower due to the recent frigid temperatures. 

Texas refinery capacity is back after a big thaw following the historic big freeze. Higher output is likely, but what is also likely is lower heating gas demand throughout the Southern US. The freak snowstorm that submerged the Lone Star State is probably not going to rear its frostbitten head any time soon. However, lower demand here could coalesce with warmer temperatures in the north to crystallise into lower natural gas prices. 

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