A Guide to the Week's Oil and Gas Market Hits and Misses

A Guide to the Week's Oil and Gas Market Hits and Misses
Rigzone's regular market watchers focus on oil and gas price moves, inventory trends, demand predictions and more.

(The views and opinions expressed in this article are those of the attributed sources and do not necessarily reflect the position of Rigzone or the author.)

In this week’s edition of oil and gas industry hits and misses, Rigzone’s regular market watchers focus on oil and gas price moves, inventory trends, demand predictions and more. Read on for more detail.

Rigzone: What were some market expectations that actually occurred during the past week – and which expectations did not?

Tom Seng, Director – School of Energy Economics, Policy and Commerce, University of Tulsa’s Collins College of Business: WTI traded in-sync with the U.S. stock market this week while Brent stair-stepped higher, creating the normal, wider spread between the two grades. Prices started the week lower on news that China would happily purchase the discounted oil from Russia. And, as the U.S. DOE announced another major release of crude from the country’s Strategic Petroleum Reserve. After falling to $108.60, WTI rebounded to over $114 per barrel on major gains in the U.S. equities markets by Thursday. Brent stayed north of the $110 mark and climbed to over $117 per barrel leading back to a spread of over $3.00 above the U.S. grade. The increased investment in the stock market resulted in a flight from currencies which lowered the U.S. Dollar, aiding oil’s rally.

This week’s EIA Weekly Petroleum Status Report indicated that commercial crude inventory fell one million barrels last week to 420 million barrels total, holding at 14 percent below the five-year average. The API reported that inventories rose 600,000 barrels while the WSJ survey predicted the exact same gain. Refinery utilization rose once again to 93.2 percent from 91.8 percent. Total motor gasoline inventories dropped 0.5 million barrels, staying at eight percent below the five-average for this time of year. Distillate inventories actually increased 1.7 million barrels and have improved to 21 percent below the five-year average. Crude oil stocks at the key Cushing, OK. hub dropped one million barrels to 24.7 million barrels or 32.5 percent of available capacity. The U.S. Strategic Petroleum Reserve dropped six million barrels and is now down to a remaining total of 532 million barrels. The DOE will release up to 39 million additional barrels from the SPR from July 1 to August 15. U.S. oil production held at 11.9 million barrels per day vs. 11 million barrels per day at this time last year. Imports of crude oil were 6.5 million barrels per day while U.S. exports averaged 4.3 million barrels per day. The U.S. oil and gas rig count rose by 14 last week to a total of 728, up 273 from a year-ago.

The UK is imposing a temporary windfall tax on oil and gas producers with the intention of lowering inflation for the average consumer. All three major U.S. stock indexes made considerable gains this week after a precipitous fall early-on. The U.S. Dollar Index sank to a one-month low which only served to fuel crude buying. The U.S. National Oceanic & Atmospheric Administration (NOAA) is predicting a busy hurricane season. The agency is forecasting 14 to 21 named storms with 6 to 10 becoming hurricanes. Any interruption in U.S. Gulf of Mexico oil production during peak driving season will only exacerbate the current high prices. The average U.S. gasoline price at the pump continues to hit new all-time highs, rising to $4.60 per gallon this week vs. $4.12 last month and $3.04 per gallon last year at this time. California legislators have proposed a bill requiring oil refiners to post their monthly profits per gallon of refined gasoline.

Hillary Stevenson, Director, Industry Relations at oil and gas data firm Validere: U.S. crude exports rose 821,000 barrels per day to 4.341 million barrels per day, the third highest weekly volume ever reported by the EIA. Export volumes were expected to rise with emergency SPR sales. On May 24, a notice of sale was issued for the next installment of releases: 39 million barrels of sour crude for delivery July 1 to August 15 and 1.1 million barrels of sweet crude for delivery June 21 to June 30. Contracts will be awarded by June 10. These releases are part of a total 180 million barrels, or about one million barrels per day, on offer in an effort to reduce oil prices. This SPR crude will either move directly to foreign markets on tankers or displace crude initially headed to U.S. refineries, resulting in higher crude exports. Market analysts estimate that U.S. export capacity is roughly six million barrels per day assuming normal port and freight conditions. The White House may impose crude export restrictions, curbing exports in an effort to lower prices at the pump.

Jon Donnel, Managing Director, B. Riley Advisory Services: Crude bounced on Thursday, but seems to be settling into a range around $110 per barrel over the past couple of weeks, as the massive releases from the Strategic Petroleum Reserve have helped to balance the international crude market. Unfortunately, this has not had the intended effect on retail gasoline and diesel prices at home as gasoline and especially diesel inventories remain low and the incremental SPR barrels do not fit well into the U.S. refining slate. More available crude barrels have supported export volumes, which topped four million barrels per day last week, the highest levels since late 2019 and the first week of Covid shutdowns – recall that U.S. production was about 13 million barrels per day then, or about one million barrels per day above current levels.

Barani Krishnan, Senior Commodities Analyst at uk.Investing.com: U.S. crude and gasoline stockpiles saw draws as expected.

Rigzone: What were some market surprises?

Seng: Henry Hub natural gas prices continue to amaze, hitting their highest levels since 2008 this week. The June NYMEX contract, which expired Thursday, had crested $9.40 for two consecutive days this week resulting in a Final Settlement of $8.91, the highest monthly settlement in 14 years. A bullish natural gas storage report only added to the existing rally. The EIA’s Weekly Natural Gas Storage Report indicated an injection last week of 80 billion cubic feet compared to forecasts calling for 90 billion cubic feet. Total gas stored now stands at 1.8 trillion cubic feet, -18 percent vs. last year and -15 percent vs. the five-year average. Early heat in the U.S. Southwest region and Texas were part of the lower surplus. Global demand for LNG continues to be strong and we are seeing more and more long-term supply contracts being executed due to concerns about future availability. LNG export projects that just a few months ago looked uneconomic are now receiving FIDs.

Stevenson: Refinery utilization rose 1.4 percent to 93.2 percent, the highest utilization since June 2019. The increase in utilization was somewhat of a surprise given an unplanned issue at Exxon’s Baton Rouge facility. While utilization rose to pre-pandemic levels, outright runs fell short, due to refinery closures. For week ending May 20, refinery crude runs were 16.296 million barrels per day, 795,000 barrels per day lower than the last time utilization reached 93 percent, as operable capacity was 867,000 barrels per day higher back in 2019. U.S. refinery capacity declined over the last two years with 11 facilities closed or planned to close. Of those, six facilities plan to convert to renewable diesel, three (Houston, Santa Maria, Gallup) currently are or will be shuttered, and one may restart (St. Croix).

Donnel: Refinery utilization came in above 93 percent for the week, reaching the highest rate since the end of 2019. This makes sense given the record high crack spreads and the expected increase in demand heading into Memorial Day, but gasoline inventories declined slightly and ultra-low sulfur diesel stocks were relatively flat week-over-week despite the upped refinery throughput. Transportation fuel demand has held relatively firm despite record high retail prices. The inventory report next week incorporating data from the holiday weekend should give a clearer indication if fuel price inflation is causing tangible demand destruction.

Krishnan: The continuous build in inventories of distillates — the middle-of-the-barrel oil — which goes into making the diesel, jet fuel and other commercial fuels so vital for the transportation sector. These inventories rose for a second week in a row as record high prices led truckers and other consumers to find ways to stretch the tank. You guessed it - demand destruction is coming. For most Americans, this is the week running up to the Memorial Day flag-off for the U.S. summer driving season. Arguably, consumption of gasoline or petroleum is at a peak at this time of the year. Some 39 million Americans are expected to hit the road from Friday, the American Automobile Association said. Yet, at $4.50 per gallon for gasoline — or more than $100 for a tank of SUV — people are likely to take fewer and shorter trips this year, the AAA said. Diesel is worse. At more than $6 per gallon, truckers and other diesel users are likely to maximize what they get from a tank, cutting unnecessary burn wherever possible. That will directly lead to demand destruction in diesel.

To contact the author, email andreas.exarheas@rigzone.com

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