Bears Out in Full Force This Week
(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 look at the emergence of a bear market, the Omicron Covid variant, OPEC+’s recent decision and more. Read on to find out what they had to say.
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: The ‘bears’ came out in full force this week instead of hibernating for winter as last week’s plummet in crude prices set the stage for even lower levels this week. Last Friday’s massive sell-off was the largest one-day fall since the infamous negative pricing in April 2020. WTI has breached $62.45 on the low end while Brent has traded below $65.75. The Omicron Covid variant has spooked the market with the prospect of future lockdowns which would result in energy demand destruction again. And, the release of strategic petroleum oil stocks, while minimally impactful in the near-term, weighed on prices, too. Statements by the U.S. Federal Reserve indicating a possible increase in interest rates served to strengthen the U.S. dollar which further depressed crude prices which have now fallen more than 20 percent since the last week of October. The meeting of the OPEC+ group this week resulted in no change in their plans to bring on an additional 400,000 barrels per day next month. But, the coalition indicated they will be watching the market closely this month. Bargain buying and a technical rebound have resulted in some late week gains, however.
The EIA’s weekly petroleum status report indicated that commercial crude inventories fell last week by -900,000 barrels to 433 million barrels, six percent below the average for this time of year. The API reported that inventories decreased by 750,000 barrels while WSJ analysts called for a drop of 800,000 barrels. Refinery utilization rose to 88.8 percent from 88.6 percent the prior week. Total motor gasoline inventories increased four million barrels and are now five percent below the five-average for this time of year. Distillate inventories rose 2.2 million barrels and now stand at nine percent below the five-year average. Crude oil stocks at the key Cushing, OK. hub gained 1.12 million barrels to 28.5 million barrels, or about 37.5 percent of capacity there. 1.95 million barrels was withdrawn from the U.S. Strategic Petroleum Reserve as part of the delivery of the previously announced sales. U.S. oil production increased 100,000 barrels per day to 11.6 million barrels per day, an 18-month high, vs. 11.1 million barrels per day at this time last year. The U.S. oil and gas rig count has increased for 16 consecutive months resulting in 249 more rigs than this time last year.
All three major U.S. stock market indices are down on the week aiding in the bearish outlook for energy. The U.S. dollar has come off of its highs for the week and looks to settle lower than last week which is bullish for oil. Natural gas continues its precipitous fall from October’s high of $6.46/MMBtu as warmer-than-normal weather is covering a large part of the U.S. and storage levels approach the 5-year averages.
Jon Donnel, Managing Director, B. Riley Advisory Services: Volatility was the theme of the week following the post-Thanksgiving selloff reminiscent of 2014. The uncertainty regarding the longer-term implications of the new Omicron Covid strain left energy markets susceptible to large intraday swings as new headlines hit the tape. Demand data points updated during the week were relatively positive and overall crude and products storage levels are generally well below historical norms, but there appears to be plenty of supply available in the short term between the OPEC+ adds and the SPR releases. Expect more price instability until enough data on Omicron is available and understood.
Tom McNulty, Houston-based Principal and Energy Practice Leader with Valuescope, Inc: OPEC+ says it will not lower its production increases, and it will keep the current 400,000 barrel increase level going into 2022. And the U.S. might delay its SPR release. This seems to be tied to a wave of fear caused by a ‘new’ strain of Covid. What matters is that OPEC+ will do what it wants to do. The administration might think it has influenced OPEC+, and it will claim this as a victory of some kind. But it has no real power over OPEC+, unless it drives or helps to drive U.S. production up substantially.
Michael Osina, Grant Thornton National Partner in Charge of Energy – Tax: Most in the oil and gas industry tend to believe prices are back to some level of steadiness, albeit some feel it will continue going up and others feel it will drop. However, most agree that prices will remain within a relatively tight band. There seems to be a new level of discipline in our industry which has not always been known for discipline. Even the most recent reaction to the release of U.S. strategic reserves and the new Omicron variant hasn’t moved the market nearly as much as some of the similar events of the past two years. It seems this may be the new normal and may provide for much more stability in an otherwise volatile industry.
Barani Krishnan, Senior Commodities Analyst at investing.com: Actually, there were none. Expectations that oil longs will defend the $70 support for U.S. WTI were shattered, along with forecasts for more healthy drawdowns in weekly data issued by the Energy Information Administration.
Rigzone: What were some market surprises?
Krishnan: There are two that really stick out; that is if you discount the near 20 percent cratering of oil prices in just one week, putting them in what we’d technically call a ‘bear market’ from the seven-year highs attained in mid-October. The first surprise is the Biden administration threatening to release even more barrels from the U.S. strategic reserve despite WTI trading at three-month lows of around $65. At above $85, the White House wouldn’t have surprised anyone by making that call. The revised strategy is probably the president’s way of telling the cartel: “We are watching to see if you’ll incite the market higher”. The bigger surprise, of course, was OPEC+ sticking to the 400,000 additional monthly barrels it had pledged since July, even for January. Given the fightback from the consuming countries, U.S. included, in releasing their reserves, one would have expected the cartel to react more belligerently.
But there’s also a popular saying: “Don’t count your chickens before they are hatched”. Applied to the case of OPEC+, the oil producing alliance is probably being very deliberate in studying what supply-demand could be in coming weeks and not being hasty in deciding anything. The cartel expects higher demand for its oil in the deep winter months of January-March, despite forecasts also showing a tick up in global supply. Whatever the case, OPEC+ can always dial back its output anytime. Thus not playing a game of chicken now with the White House might just be right. Also, the OPEC+ decision shows rare magnanimity by the Saudi Salman brothers towards oil consumers. The crude market, accordingly, rewarded the alliance by sending prices up more than one percent on Thursday from the prior day’s three-month lows.
Donnel: The OPEC+ decision to maintain the previously agreed to supply increase of 400,000 barrels per day in January at their monthly meeting was a bit surprising given the negative demand impacts of the Omicron variant implied by the steep declines in front-month crude contracts. However, the more interesting development was that the group did not officially close the meeting, leaving open the possibility for a change of course before the next gathering planned for early January. Oil prices had dropped early on Thursday as the news that OPEC+ was sticking to its production targets was confirmed but rebounded as this flexibility was better understood by the market. The compromise gives the cartel more ability to react to market changes and incorporate new data regarding the severity of the new variant, and also shows their desire to keep prices from falling much more from current levels.
Seng: The oil market appeared to overreact bearishly to the first reports of the Omicron variant. Meanwhile, the OPEC+ group decision to stay with their planned output increase next month was practically ignored with some traders insisting the coalition will take action in the form of reducing production with these lower prices.
McNulty: We keep seeing new Covid news as a harbinger of economic activity, thereby impacting crude oil prices. In my view there is a fatigue in most geographic economies such that this new variant will just not be impactful. The longer ends of the forward curves show us a supply-demand balance hint. For December 2024, ICE Brent is at $62.85 and WTI is at $59.
Osina: The release of 50 million barrels from the U.S. strategic reserve may have come as a surprise to many but had very little impact on the market prices, even though the current administration’s primary goal was to drive prices at the pump down. Further, the newly found Omicron Covid variant came as a surprise and has shaken the market. It remains to be seen how much of an impact this has and for how long.
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