Energy Sector Rally Continues

Energy Sector Rally Continues
Rigzone's regular market watchers examine the energy sector rally, demand forecasts, the U.S. rig count 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 focused on the energy sector rally, demand forecasts, the U.S. rig count 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 rally across the energy sector continued this week with WTI crude hitting levels not seen since October 2014 when prices were descending from that June’s high of $107 per barrel. The U.S. standard eclipsed $82 per barrel while Brent crested $84. WTI is up 65 percent on the year and 125 percent year-on-year. And, with the exception of a bearish crude inventory report, strong bullish fundamentals remain. Global natural gas prices, which are running higher than crude on a per MMBtu basis, continue to push industrials and power generators to consider the switch to refined oil products, further strengthening demand. November 2021 NYMEX natural gas futures hit a 13-year high last week after crossing above $6.45/MMBtu. The Brent/WTI spread has slipped to under $3 per barrel. Despite these higher prices, U.S. E&P companies continue to exercise fiscal restraint as dictated by their shareholders and creditors. However, there are twice as many drilling rigs operating (700) in the country as there were last year at this time.

This week’s holiday-delayed EIA weekly petroleum status report indicated that commercial oil inventories increased by a bearish 6.1 million barrels to 427 million barrels, six percent below the average for this time of year. The API reported that inventories increased by 5.2 million barrels while WSJ analysts called for a small, 900,000 barrel gain. Refinery utilization fell to 86.7 percent from 89.6 percent the prior week. However, on the bullish side, total motor gasoline inventories decreased two million barrels and are now two percent below the 5-average for this time of year. Distillate inventories remained flat and now stand at nine percent below the 5-year average. Crude oil stocks at the key Cushing, OK. Hub were 1.97 million barrels lower to 33.6 million barrels, or about 44 percent of capacity there. 800,000 barrels was withdrawn from the U.S. Strategic Petroleum Reserve as part of the delivery of the previously announced sales. U.S. oil production rose 100,000 barrels per day to 11.4 vs. 10.5 million barrels per day at this time last year. 

AAA is reporting that retail gasoline in the U.S. continued to increase this week, hitting a seven year high as it climbed to $3.29/gallon while November futures hit a seven year high of $2.44/gallon. Despite obvious supply chain issues impacting businesses across the board, the Dow, S&P and NASDAQ are all higher on the week adding upward momentum to energy prices. Meanwhile, the U.S. dollar is lower which also serves to buoy crude prices. Although global LNG prices continue to remain strong, U.S. futures prices have not returned to the lofty $6.00+ levels from last week as we can’t currently increase our capacity to export by very much. Getting a boost from the weekly natural gas storage report, November NYMEX futures prices did attempt a run at $6.00 only to fall back on milder weather.

Samuel Indyk, Senior Analyst at Oil prices continued their surge higher at the beginning of the week to hit multiyear highs as expectations of increased demand continued to support oil. The higher gas prices in Europe and Asia are also expected to keep demand propped up as producers make the switch from gas to oil. Some estimates suggest this could see demand for crude increase by up to 500,000 barrels per day.  

Tom McNulty, Houston-based Principal and Energy Practice Leader with Valuescope, Inc: The U.S. rig count increased again this week, but not by as much as it needs to in order for more crude barrels and natural gas to be brought to market. Producers are being careful, but the demand is there for them.

Rigzone: What were some market surprises?

Indyk: One of the biggest surprises was OPEC trimming its forecasts for global oil consumption for 2021. The cartel cut its demand growth forecast for this year by 160,000 barrels per day, although this was driven by lower than expected actual data from the early part of the year due to Covid and the Delta variant. Nevertheless, all the rumblings have been about a pick-up in demand into Q4 as countries relax international travel restrictions and the vaccines help the world return to normality.

Mcnulty: Both WTI and Brent are trading higher today [Thursday], and I think the market was surprised that there was a large draw on U.S. gasoline and distillate inventories. The draw is bullish for crude because it signals demand for fuel, indicating positive economic activity. This means demand for crude should continue to rise incrementally through the end of the year and again into 2021.

Seng: The IEA this week increased its crude demand forecast for 2022 by 210,000 barrels per day but indicated that, in the short-term, demand may be up as much as 500,000 barrels per day due to widespread fuel-switching.

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