Higher Oil Prices a Function of Higher NatGas Prices

Higher Oil Prices a Function of Higher NatGas Prices
Rigzone's regular market watchers take a closer look at commodity prices, the energy transition, OPEC+ developments and more. Read on to find out what they had to say.

(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 take a closer look at commodity prices, the energy transition, OPEC+ developments 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: Strong fundamentals continue to support higher and higher oil prices. WTI has broken the $76 per barrel mark while Brent has crested $80 this week as each grade hit 3-year highs. In many cases, the higher oil prices are a function of higher natural gas prices. With the UK, Continental Europe and Asia all experiencing natural gas shortages and higher LNG prices, some utilities and industrials are switching to oil, thus creating an unexpected demand for crude. Many of the Asian contracts for LNG are still tied to a basket of imported oil prices. Despite the return of the majority of production, U.S. Gulf of Mexico outages are still being felt worldwide. Meanwhile, China ordered its top energy firms to stock-up on oil ahead of winter at any price, providing firm support for global oil prices. Demand for oil has increased about 12 percent in the past six months driven by the end of lockdowns and successful vaccine campaigns in many areas. Meanwhile, supply is up only four percent. Per their planned output increases, OPEC+ will add +400,000 barrels per day on October 1. The group will hold a meeting on Monday, October 4, to consider possible further increases in production.

The only bearish sign came from the weekly inventory report which showed unexpected increases across the board. This week’s EIA Weekly Petroleum Status Report indicated that commercial oil inventories increased by +4.6 million barrels to 418 million barrels, seven percent below the average for this time of year. The API reported that inventories decreased by -4.1 while S&P analysts called for a -4.5 million barrel decline. Refinery utilization was 88.1 percent vs. 87.5 percent the prior week. Total motor gasoline inventories saw a slight increase of 200,000 barrels, at three percent below the 5-average for this time of year. Distillate inventories increased by +400,000 barrels and have now fallen to 12 percent below the 5-year average. Crude oil stocks at the key Cushing, OK. Hub rose 130,000 barrels to 33.9 million barrels or about 45 percent of capacity there. 900,000 barrels was withdrawn from the U.S. Strategic Petroleum Reserve. U.S. oil production rose +500,000 barrels per day to 11.1 million barrels per day. Pre-Ida production had reached 11.5 million barrels per day. Royal Dutch Shell does not expect its U.S. Gulf of Mexico infrastructure, damaged by Ida, to be operational until 1Q22.

The U.S. economy was not a factor in supporting crude prices as the Dow, S&P and NASDAQ are all lower on the week with the Dow’s September loss the most since October 2020. The U.S. Dollar has traded generally higher this week but has not placed a ceiling on crude prices.

Jon Donnel, Managing Director, B. Riley Advisory Services: Natural gas prices continued to rally as storage levels in Europe are at decade lows ahead of the winter heating season. The reduced supply on hand is creating a worldwide scramble to purchase incremental volumes, resulting in record high prices for natural gas in Europe and LNG in Asia. NYMEX prices topped $6.00/mmbtu this week as the impacts reached U.S. markets as well. Late Thursday, Chinese state-owned energy companies were told to secure supplies “at all costs”, suggesting further price increases for natural gas, oil, coal, and electricity are forthcoming.

Tom McNulty, Houston-based Principal and Energy Practice Leader with Valuescope, Inc:  I think that the demand for energy will continue to rise unabated, and this demand will not “cooperate” with attempts to cut down on fossil fuel production too rapidly. The recent rise in natural gas prices and in LNG prices in Europe and in Asia is causing the demand for coal and for oil to rise. These are both obviously carbon-intensive sources for the production of electricity and are more carbon intensive than natural gas. As we head into winter, in the Northern Hemisphere, this will become very problematic unless more natural gas production comes online fast.   

Barani Krishnan, Senior Commodities Analyst at Investing.com: OPEC+ considering a higher production than the 400,000 barrels per day they had originally committed, with oil prices at near 3-year highs.

Rigzone: What were some market surprises?

Mark Le Dain, vice president of strategy with the oil and gas data firm Validere: LNG prices continue to surprise with new records announced daily. Europe, the UK in particular, is a great example of how not having consistent baseload power actually risks consumer support for the energy transition. A number of countries retired nuclear but didn't build out the gas storage to replace it and now have extremely high prices at the same time that renewable contributions are lower than expected, especially wind in the UK. The risk now for other countries accelerating their transition is that you clearly have to keep power prices at levels where you still have broad support and it doesn't impact lives and business so negatively. Natural gas likely remains the best approach here. 

Seng: Global LNG prices skyrocketing to the point of fuel-switching to oil and China’s mandate that energy companies stock-up on winter supplies at any cost.

Donnel: Crude participated in the commodities rally despite relatively bearish data points during the week. U.S. storage levels increased by almost five million barrels, the dollar index was near 12-month highs, and U.S. production was back over 11 million barrels per day as GOM wells continue to come back online following the recent hurricanes. However, WTI stood above $75 per barrel at the time of this writing and Brent hit $80 per barrel earlier in the week, indicating demand remains strong. Pay attention to this side of the equation if prices remain elevated. Current prices do not imply demand destruction is imminent, but broader inflation rates appear less transitory by the week and overall purchasing power could be under pressure.

Krishnan: The U.S. Energy Information Administration said crude stockpiles rose by 4.58 million barrels in the week to Sept 24 versus forecasts for a drop of 2.2 million. Instead of correcting meaningfully on the data, crude prices which have risen more than 10 percent since the start of September, lost less than one percent in Wednesday’s trade after the data. This clearly shows that the bulls in control of the market were more focused on Goldman Sachs’ call of $90 per barrel for Brent (now at just under $80) by the end of the year, versus a likelihood of weekly U.S. inventories continuously rising from here. The EIA also said that gasoline inventories rose by 193,000 barrels in the last week, versus the forecast draw of 1.5 million. It was the second straight weekly build for gasoline stockpiles, which rose by a beefy 3.48 million in the previous week. Even that was ignored by the market. At least OPEC+ seems to recognize that the market may be getting ahead of itself and decided to cool things down somewhat with a higher production when it meets next week.

Mcnulty: I thought the rig count increase of only +9 was a surprise, expecting it to increase by more. Look for the North America rig count to rise further in the months ahead, especially as the demand for natural gas keeps going up.

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

What do you think? We’d love to hear from you, join the conversation on the Rigzone Energy Network.

The Rigzone Energy Network is a new social experience created for you and all energy professionals to Speak Up about our industry, share knowledge, connect with peers and industry insiders and engage in a professional community that will empower your career in energy.