Market Says Boo! To OPEC+
(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 reasons behind recent oil price moves, the latest OPEC+ meeting, the July 4 weekend 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: Oil prices started-off strong this week only to fall back on economic growth concerns and bearish supply/demand news. There now exists a vicious cycle whereby higher energy prices are contributing to higher inflation, leading to the U.S. Federal Reserve raising interest rates, leading to the prospect of lower economic growth which could lead to less energy consumption and so on. Anticipating strong demand for the upcoming July 4 weekend in the U.S., WTI moved higher early week, piercing $114 per barrel, while Brent topped $120 per barrel on a plan by the G7 to attempt to limit the global price paid for Russian crude exports. Additionally, the market continues to doubt the ability of the OPEC+ members to actually provide more barrels while China is lifting its Covid restrictions, setting-off more demand. An increase in refined product inventories along with increasing U.S. oil production pushed prices lower in the week with WTI breaching $106 per barrel while Brent approached $114 per barrel. The Biden administration’s trip to Saudi-Arabia is generally not expected to result in any increase in oil output from the kingdom.
This week’s EIA Weekly Petroleum Status Report indicated that inventories of commercial crude dropped 2.8 million barrels to 416 million, or 13 percent below normal for this time of year. The API reported that inventories fell by a substantial 3.8 million barrels, while the WSJ survey predicted a drop of 800,000 barrels. Refinery utilization rose again from 94 percent to 95 percent, the highest level since September 2019. Total motor gasoline inventories increased by 2.6 million barrels and are eight percent below average. Distillates increased by 2.6 million barrels but are 20 percent below normal. Crude oil stocks at the key Cushing, OK, hub slipped 700,000 barrels to 21.3 million barrels, or 28 percent of capacity. Imports of crude were 6.0 million barrels vs 6.2 million barrels the prior week, while exports were 3.4 million barrels per day vs 3.6 million barrels per day. Total refined product exports were 6.1 million barrels per day. U.S. oil production rose to 12.1 million barrels per day, the highest level since April 2020.
AAA is forecasting that a record number of Americans will take road trips over the long 4th of July weekend, with about 42 million taking trips of 50 miles or more. However, the EIA indicated that gasoline demand for the past two weeks has declined to 8.7 million barrels per day, lower than last year at this time. The agency is speculating that perhaps high prices have curbed consumption to some degree. The National Hurricane Center is monitoring two Tropical Cyclones that have formed in the Caribbean. The agency stated that there are normally no systems near the ‘ABC’ islands this early in the hurricane season. Something else to watch on top of Russia/Ukraine, inflation, summer driving, China, etc. All three major stock indexes are down on the week as the inflation/interest rate hike dynamics playout. The U.S. Dollar looks to settle lower for the week which may be aiding in the lower oil prices.
Michael Osina, Grant Thornton National Partner in Charge of Energy: Biden recently suggested a holiday for the federal gas tax as well as encouraged states to do the same for their portions of the tax. Congress is lukewarm at best at helping him achieve his goal. However, even if the tax holiday were put in place, economists seem to be less than optimistic that it would actually achieve the results that Biden intends with some saying the impact would be less than meaningful to the average family. Furthermore, how much of the reduction would actually even make it to the consumer is unclear.
Barani Krishnan, Senior Commodities Analyst at uk.investing.com: OPEC+ actually kept to its word on hiking production, confirming a more than 50 percent output hike in July and August from June.
Rigzone: What were some market surprises?
Seng: While finally breaking below $6.00 per MMBtu for the first time since early April, the saga for natural gas is not over yet. The 27-member EU is emphasizing that its natural gas storage reserves for the upcoming winter need to be at least 80 percent full. The EU Council adopted a regulation this week mandating that all underground natural gas storage facilities on EU soil be at 90 percent full before November 1. Their self-imposed boycott of Russian energy imports, coupled with Russia’s own reduction in gas supplies to the EU, may make this goal unachievable. If Europe is looking to the U.S. for help, the Freeport LNG export facility in the U.S. is estimated to be shut down for longer than expected after some operational safety issues have been raised by PHMSA inspectors. The 2.0 billion cubic feet per day normally sent out is being absorbed into the domestic U.S. natural gas market which is seeing increased demand for power generation during the summer heat. On the bearish side for domestic natural gas in the U.S., this week’s EIA Natural Gas Storage Report indicated an injection last week of 74 billion cubic feet vs forecasts calling for 75 billion cubic feet and a 5-year average of 73 billion cubic feet. Total gas stored is now 2.25 trillion cubic feet, -11.6 percent from last year and -12.5 percent from the 5-year average.
Krishnan: The market said “boo!” to OPEC+ - not sending oil up this time like it did each time after an OPEC meeting over the last six months. That’s the skinny on the oil market. Now for the somewhat long version: the oil rally may be nowhere near to over. But the astronomical month-after-month gains in crude prices has ended, at least for now, as recession worries lead to double-digit losses in June for some longs in the game. While crude prices still finished the second quarter up - with U.S. benchmark West Texas Intermediate gaining five percent and global benchmark Brent one percent - for June, they were deeply in the red. Brent finished the month down more than 11 percent, while WTI was off by over seven percent. Thursday’s drop alone of nearly five percent weighed heavily on the two crude benchmarks as producer cartel OPEC+ and its allies confirmed a previously agreed production of nearly 650,000 barrels per day for July and August - up more than 50 percent from June. The Saudi-led and Russia-supported alliance of 23 oil producers said the higher output will be necessary to meet the spike in crude demand projected for the next two months, which are expected to see inordinately high road and air travel from people making up for two years of relative summer-time inactivity forced by the coronavirus pandemic. But the fear of a potential recession appeared to loom larger than OPEC’s demand outlook. U.S. gross domestic product likely fell by an estimated one percent in the second quarter of 2022, the Atlanta Federal Reserve said on Thursday in the first official forecast of recession by a division of the central bank - following the 1.6 percent economic decline in the first quarter. So, there you have it. The R-word is finally out of the Fed’s mouth itself.
Osina: A slight decrease in oil prices over the last week has been interesting but it appears real concerns over a global recession have set in. Even with that development, it appears prices will still remain high on the constrained supply, absent the Saudis increasing their output. Biden is set to visit Saudi Arabia and request an increase in supply, but given his relationship with the Saudis, it’s unclear if they will respond.
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