Recovery demand stimulates oil price rally

Oil prices are at their strongest levels for months. Natural gas is performing strongly too. Is now a good time for hydrocarbons traders?

Oil trading

Oil prices are strong right now, in some cases reaching highs not seen for nearly three years.

Since starting the week strongly, WTI and Brent contracts are performing well, at $71.2 and $71.4 as of Tuesday morning.

More gains are potentially on their way. The summer is coming with looser lockdowns and freer travel. Analysts are forecasting higher air and vehicle traffic worldwide, stimulating demand for fuel, thus driving up prices.

The IEA, for instance, is forecasting a 30% spike in jet fuel consumption throughout the summer, mostly driven by domestic travel in the US and EU.  Global demand is expected to peak at 5.8 million bpd this year.

In the US, the EIA believes jet fuel demand will peak at 1.47 million bpd Q3 2021 – up from 1.13 million in the first quarter and more than 50% higher than a year earlier.

But let’s be real. Travel is not anything like it was pre-pandemic. It probably won’t be for some time. However, what we’re seeing here is incremental progress in key economies towards normality.

Despite this, the IEA is calling for OPEC & allies to really open the taps. The agency’s projections optimistically suggest oil demand will reach pre-pandemic levels as early as 2022. To cater for growing demand from springboarding economies, the IEA has stated that “OPEC+ needs to open the taps to keep the world oil markets adequately supplied”.

The above is good news for oil producers, but it does raise a big question. If world markets are in danger of being undersupplied like the IEA thinks, then why are oil traders anxious over Iran?

Ongoing discussions between Tehran and Washington sees the Iranian side hoping to see a lifting of US-imposed sanctions and a new nuclear deal hashed out. One of the many options being mooted is reintroducing Iranian crude onto global markets once more.

OPEC+ has been left feeling trepidatious. The cartel has been carefully controlling its output volumes across the pandemic to protect prices. A glut of Iranian crude washing over markets may lead to a glut, which may drop prices – something no one wants to consider in the middle of this rally.

US Secretary of State Antony Blinken signals a significant number of sanctions will remain in place, regardless of closer Iranian compliance to the US-Iran nuclear deal. Goldman Sachs, suggests negotiations will be slow, thus avoiding oversupplying markets and cooling bearish expectations.

Last week’s EIA inventories report showed a further drop in stockpiles, declining 5.2m barrels, reinforcing recovering demand throughout the US.

Natural gas trading

Natural gas traded above $3.20 on Monday morning as it looked to break through the $3.30 level, which it did on Tuesday in early trading.

Cooling season is here. Natural Gas Weather puts US nationwide demand on a high footing with heatwaves coming in California and Texas, while temperatures are on the warm to high side across the country.  

Total working gas in storage as of week ending June 4 stood at 2,411 Bcf, according to the EIA’s last natural gas storage report. This is 383 Bcf below last year’s volumes and 55 Bcf below the five-year average. 

Reduced pressure on the TETCO pipeline, one of the Gulf’s key nat gas arteries, is likely to remain at low-pressure operation until Q3 2021, further supporting prices. 

LNG feed gas levels have dropped off, down to 9.6 Bcf from the near 11 Bcf highs seen earlier in the year. However, rising LNG demand from China could spur on higher exports from US sources, again building up prices. As of now, however, key Texan infrastructure is closed for maintenance, hence the lower terminal volumes.