Brent-WTI Oil Price Spread Inverts

Brent-WTI Oil Price Spread Inverts
Rigzone's regular market watchers focus on the inversion of the Brent-WTI oil price spread, the start of the U.S. hurricane season, gasoline prices 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 the inversion of the Brent-WTI oil price spread, the start of the U.S. hurricane season, gasoline prices 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: In the crude markets, the Russia/Ukraine conflict seemed to take a backseat to another bad week on Wall Street, inflation measures undertaken by the U.S. Fed, and rumors of the potential lifting of U.S. sanctions against Venezuela which would increase global supplies. WTI managed a high for the week of around $115.55 per barrel before falling back under $112. Meanwhile, Brent crude rose to $115.70 per barrel and also moved lower to almost parity with the U.S. grade. The Brent/WTI spread was actually inverted at one point this week which may reflect the substantially higher demand in the U.S. as exportation economics don't support this tight relationship. The U.S. economy took a hit this week as April retail sales expectations fell far short on inflationary concerns. Analysts surmised that the average American is spending disposable income on higher energy and food costs. As a barometer of future energy demand, the U.S. equities markets pressured prices.

This week’s EIA Weekly Petroleum Status Report indicated that commercial crude inventory fell 3.4 million barrels last week to 421 million barrels total, dropping to 14 percent below the five-year average. The API reported that inventories fell 2.4 million barrels while the WSJ survey indicated a 1.4 million barrel gain. Refinery utilization rose again to 91.8 percent from 90.0 percent. Total motor gasoline inventories dropped 4.8 million barrels, falling to eight percent below the five-average for this time of year. Distillate inventories actually increased 1.2 million barrels but are now at 22 percent below the five-year average. Crude oil stocks at the key Cushing, OK. hub dropped 2.4 million barrels to 26 million barrels, or 35 percent of available capacity. The U.S. Strategic Petroleum Reserve dropped 5.0 million barrels and is now down to a remaining total of 543 million barrels. U.S. oil production fell 100,000 barrels per day to 11.8 million barrels per day vs. 11 million barrels per day at this time last year. Imports of crude oil increased to 6.27 million barrels per day from 6.33 million barrels per day, while U.S. exports averaged 2.9 million barrels per day. The U.S. oil and gas rig count rose by nine last week to a total of 714, up 261 from a year ago. The EIA is projecting a production increase of 142,000 barrels per day from the U.S. shale oil plays for next month. Total shale crude production is estimated to hit 8.8 million barrels per day in June, the highest level since March 2020. The Permian Basin alone is expected to hit a record high of 5.22 million barrels per day.

All three major U.S. stock indexes continued their downward trends this week, trading at 12-month lows largely on the retail sales figures and concerns that the increase in the Fed rate will hurt economic development. The U.S. dollar is also sagging this week which may be helping crude establish a bottom. At a time when the crude market cannot handle any supply disruptions, the University of Miami's Hurricane Forecast Center is predicting the formation of a ‘Loop Current’ in the U.S. Gulf of Mexico. The development is looking eerily similar to 2005 when Katrina struck. GOM temperatures are already warmer than normal with a large swath ‘looping’ further into the Gulf already. The official start of the U.S. hurricane season is June 1 and lasts until November 30. Even the development of tropical systems in the GOM necessitate shutting-in offshore platforms as personnel are removed for at least a few days.

The average U.S. gasoline price at the pump continues to hit new all-time highs, rising to $4.56 per gallon this week. According to AAA, all 50 U.S. states now have prices exceeding $4.00 per gallon. In what may be a promising sign for gasoline, June RBOB futures are trading over USLD, reversing the trend from recent weeks. While this change may not lower gasoline for the summer, it does indicate a switch in perceived demand for both refined products. Concerns remain over the low diesel inventories which hit a 17-year low last week.

Gerrad Heep, National Partner In Charge of Energy – Audit, Grant Thornton: Fueled by continued fears of global supply constraints, the price of gasoline hit new highs in the U.S. It is not an uncommon expectation that high, sustained crude prices lead to M&A activity. That relationship has not been closely aligned as of late. Uncertainty, for a number of domestic and global reasons, is likely causing producers to be more cautious and intentional in their approach to M&A.

Rigzone: What were some market surprises?

Seng: You still can’t take your eyes off of the natural gas futures market which managed to stay above $8.00 this week as more concerns arise regarding Russian exports. With Finland and Sweden considering membership in NATO, tensions between those countries and Russia will only intensify and Putin has already made veiled threats. The EIA’s Weekly Natural Gas Storage Report indicated an injection of 85 billion cubic feet last week compared to 71 billion cubic feet last year and a five-year average of 87 billion cubic feet. Total storage is 17 percent below last year and 15 percent lower than the five-year average. Global LNG demand remains strong and the EU is depending on U.S. exports of LNG as part of their plan to wean themselves of Russian natural gas imports. In the U.S., hot weather is already increasing the use of natural gas for power generation.

Heep: On May 13, the national average gas price hit a new record high of $4.43 per gallon. On the same day, the Interior Department announced that three high-profile leases in Alaska and the Gulf of Mexico were being cancelled. Did not expect that.

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