Inflation Signals Bolster Oil Price Outlook

Inflation Signals Bolster Oil Price Outlook
Here is a review of oil and gas market hits and misses for the week ending May 28, 2021.

(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.)

Inflation, India, and Iran have figured prominently in global energy markets recently, and the past week has been no exception. In this latest installment of weekly oil and gas market hits and misses, find out what some of Rigzone’s regular prognosticators have to say about the latest developments on these and other fronts.

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

Jon Donnel, Managing Director, B. Riley Advisory Services: Oil prices rebounded to start the week as the Biden administration indicated that Iran has not yet re-established compliance with the 2015 nuclear agreement, which would be required to remove trade sanctions and allow Iranian barrels back into the market (officially). West Texas Intermediate (WTI) prices pushed towards 52-week highs as refinery utilization increased and crude and product stocks decreased ahead of heavy travel plans for the Memorial Day holiday. Better-than-expected payroll numbers and continued inflation signals make for a solid foundation for commodity prices going forward.

Tom Seng, Director – School of Energy Economics, Policy and Commerce, University of Tulsa’s Collins College of Business: WTI traded at levels not seen since October 2018 this week while Brent crude rose towards the $70 mark on tightening supplies and indications of increasing consumption as pandemic restrictions continue to be lifted in many areas. And, while the Israel-Palestine conflict has raised concerns over Middle East oil supplies, the dire COVID-19 situation in India represents a substantial loss of demand from the world’s No. 3 importer of crude. Additionally, the ebb-and-flow of negotiations with Iran over the nuclear deal tugged at price direction almost daily.

Another inventory draw this week helped the bullish rally as crude and refined products are all at levels below their respective five-year averages. The Energy Information Administration (EIA) Weekly Petroleum Status Report indicated that commercial oil inventories decreased by 1.7 million barrels. Wall Street Journal analysts were calling for a 2.2 million-barrel drop while the American Petroleum Institute reported that inventories were 439,000 barrels lower. Total crude stored now sits at 484 million barrels, 2% below the five-year average for this time of year. Refinery utilization rose 0.7% to 87%. Total motor gasoline inventories decreased by 1.7 million barrels and are now at 3% below the five-year average. Distillates decreased by 3 million barrels and have fallen to 8% below the five-year average. Crude oil stocks at the key Cushing, Okla., hub dropped 1 million barrels to 59% of capacity there. U.S. oil production held 11 million barrels per day (bpd). Additionally, there was another draw of about 1.6 million barrels from the Strategic Petroleum Reserve as the U.S. government continues to sell.  

The Dow and S&P are trading near their record highs while the NASDAQ is off from its peak. All three indices look to settle higher on the week. The U.S. dollar is lower today after spiking briefly on inflationary government reports. The price index for Personal Consumption Expenditures (PCE), the Federal Reserve’s preferred measure of inflation, rose 3.1% from a year-ago in April. And, while personal spending was up 5% last month, personal income dropped 13%.

Despite a larger-than-expected injection this week, natural gas has risen back to the $3 level through March of 2022 on a cold front that hit the Upper Midwest. The EIA’s Weekly Natural Gas Storage Report showed an injection of 115 billion cubic feet (Bcf) vs. analysts’ forecasts calling for a gain of 101 Bcf. Stored natural gas now stands at 2.2 trillion cubic feet, 15% lower than last year and 3% below the five-year average. Supplies of natural gas increased to 92.4 from 91.8 Bcf per day (Bcfd) the prior week. Total demand last week was 82.7 Bcfd, up from 80.6 Bcfd the prior week, with the main increase coming from the power generation sector. Exports to Mexico rose to 6.2 Bcfd while exports of LNG were lower at 10.5 Bcfd.

The relaxing of pandemic restrictions in several U.S. states has led to an increase in gasoline consumption which now stands at just 4% below the five-year average for mid-May. The national average price per gallon of gasoline remains above $3 – a seven-year high and 58% above year-ago prices heading into the start of the summer driving season.  

Rigzone: What were some market surprises?

Donnel: ESG (environmental, social, and corporate governance) has steadily been taking on increasing importance in the oil and gas industry, but environmentally focused investors scored some unexpected wins this week. Most notably, ExxonMobil (NYSE: XOM) shareholders voted in at least two new board members nominated by the activist hedge fund Engine No. 1, who holds well less than 1% of the company’s shares but had the backing of state pension funds and large passive investors. The company’s poor returns in recent years opened the door for these votes, but the result is likely to spur more pressure from environmental groups and direct investment towards energy transformation projects at a faster pace. In addition, a Dutch court ruled that Shell (NYSE: RDS.A) must cut its carbon dioxide emissions by 45% by 2030, more than double the company’s target 20% reduction over the same time frame and Chevron (NYSE: CVX) shareholders voted for the company to cut Scope 3 emissions. Collectively, these events all make it more difficult for major producers to add future supply and therefore support longer-term oil prices.

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