Oil pulls back while gas remains strong

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.