Oil prices stabilise but supply issues send mixed signals

Oil prices are back above $70, but is this sustainable? The trader community appears split over oil’s course. Elsewhere, natural gas keeps its rally going, enjoying its time in the sun.

Oil trading

There appears to be a growing split in the oil trading community.

On one hand sits those who believe the OPEC+ engineered supply deficits will help foster high prices as demand recovers. On the other there are those traders who feel demand is being erased before it can reach its peak, thanks to growing Covid-19 cases and low vaccination rates worldwide.

How will this factor into oil prices? It’s hard to say at this stage. Current prices seem to sit around the fact traders have priced in the worst case scenario.

As of Tuesday, WTI futures were trading for around $71.6.

Brent contracts were exchanging hands for roughly $73.45.

Apart from rising cases in key importers, other factors at play here could put pressure on oil prices.

Supply squeezes maybe a recurring theme until the pandemic is over, even with OPEC & allies tapering up production by 400,000 bpd each month from now until April 2022.

One is China’s clampdown on import quota abuse. Authorities in the world’s largest crude importer are planning a crackdown on the misuse of import quotas. This may create a 20-year low in inbound Chinese oil shipments.

Looking to EIA storage data, inventories increased by 2.1 million barrels in the review period up to July 16^th. At 439.7 million barrels, U.S. crude oil inventories are about 7% below the five year average for this time of year.

But there is positive news. Rig counts also continue to rise. Baker Hughes reports the total US oil & gas rig count has increased for the fourth consecutive week, indicating strong future output.

As of week-ending July 23^rd, 491 rigs were active in US production areas – the highest level since April 2020. Seven oil rigs were added to counts, although gas rigs stayed static.

Natural gas trading

Natural gas started the week strongly, breaching the $4.00 level, and continuing gains made across last week.

Intense heat in key US geographies is helping power the rally as short-term cooling gas demand intensifies. European weather patterns, however, are trending towards cooler temperatures, which may lower demand here across the rest of the week.

As per Natural Gas Weather: “National demand will be strong this week as hot upper high pressure rules most of the US w/highs of 90s to 100s, including 95-100°F Texas.

“A stronger weather system w/showers and cooler air will push across the Great Lakes and Northeast late in the week and next weekend w/highs of 70s and 80s to ease national demand.”

While US oil rig counts have increased, according to Baker Hughes, gas rig counts have stayed static. As of week-ending July 23^rd, 104 gas rigs were operating in key US gas production geographies.

US working gas in storage was 2,678 Bcf as of Friday, July 16, 2021, according to EIA estimates. This represents a net increase of 49 Bcf from the previous week. Stocks were 532 Bcf less than last year at this time and 176 Bcf below the five-year average of 2,854 Bcf. At 2,678 Bcf, total working gas is within the five-year historical range.