Oil Demand Growth Overcomes Vax Setbacks
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Oil demand growth is progressing despite hurdles linked to COVID-19 vaccinations, according to one of Rigzone’s regular market-watchers. Keep reading for perspective on that and other recent market developments.
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: U.S. crude inventory levels were expected to decline during the week – though actual numbers fell by about 3 million barrels more than consensus estimates – as refinery utilization continues to ramp up. Demand indicators are moving in the right direction, despite setbacks in vaccination deliveries and patches of rising COVID cases and new variants. Total interstate highway miles reached a notable milestone this week, surpassing the level at the same week in 2019 for the first time since the start of the pandemic, according to the U.S. Department of Transportation. These positive trends led the International Energy Agency (IEA) to revise its 2021 annual crude oil demand estimate up by over 200,000 barrels per day compared to its prior forecast.
Tom Seng, Director – School of Energy Economics, Policy and Commerce, University of Tulsa’s Collins College of Business: West Texas Intermediate (WTI) and Brent rose to price levels not seen since mid-March on multiple factors, including another rebel attack on Saudi oil infrastructure, forecasts for increasing demand this year, a strong U.S. stock market, and a weaker U.S. dollar.
Yemen’s Houthi rebels carried-out explosive drone attacks on multiple Saudi Arabian oil terminals last Sunday, giving the oil markets a bullish start to the week. Additionally, Iran accused Israel of attacking its main nuclear facility, which only served to increase the geopolitical risks for oil in the region. More bullish market signals emerged this week as OPEC’s monthly report forecasted an increase in demand for oil this year to 96.5 million barrels per day (bpd) on average. This is an increase of 100,000 bpd from their last forecast and was based upon stimulus programs, vaccine rollout, and easing of COVID-19 restrictions. The cartel’s report also sees global economic growth rising to 5.4%, up from 5.1% previously projected. The IEA has also forecasted an uptick in global oil demand of 230,000 bpd for 2021, reinforcing the overall bullish outlook.
An increase in U.S. refinery activity, coupled with a larger-than-expected drop in crude inventory, added more upward momentum to an already bullish market. The (U.S. Energy Information Administration [EIA]) Weekly Petroleum Status Report indicated that commercial oil inventories fell by 5.9 million bpd to a total of 492 million barrels, or 1% above the five-year average. This was in stark contrast to the American Petroleum Institute report showing a 3.6-million-barrel decline and a Wall Street Journal analysts’ forecast of a 2.5-million-barrel drop. Refinery utilization rose 1% to 85% from 84% the week prior. But, while this is a 13-month high, utilization remains below the April 2019 level of 87.7%. Total motor gasoline inventories decreased by 300,000 barrels and are now at 2% below the five-year average with the summer driving season starting at the end of next month. Distillates decreased by 2.1 million barrels and are 4% above the five-year average. Crude oil stocks at the key Cushing, Okla., hub rose 346,000 barrels to 46.7 million barrels, or 61% of capacity there. U.S. oil production increased by 100,000 bpd to 11 million bpd. Additionally, there was a draw of about 1 million barrels from the Strategic Petroleum Reserve.
The Dow and S&P charted new highs this week while NASDAQ remains below the high set last month. The U.S. dollar fell to a three-week low this week, further adding support to oil prices as the commodity is traded in greenbacks globally. After a rally last month, the currency has returned to the downtrend which began a year ago.
Mexico’s lawmakers are considering a law that could reverse the “open” market established there over five years ago. The proposed regulation would grant the government “discretionary powers to suspend permits granted to private companies for various mid- and downstream (oil & gas) activities.” The proposal reeks of a return to nationalizing private, international company assets.
Colorado State University released its first forecast for the upcoming hurricane season, predicting 17 named storms including four major hurricanes for the Atlantic Basin. The seasonal average is 12 named storms. Given the more recent history of these storms causing damage in the Gulf Coast region, forecast updates will be closely watched in the months ahead.
Natural gas prices continued an eight-day uptrend this week as a less-than-expected storage injection is coupled with some late-season heating demand in the upper-Midwest and Northeast U.S. The EIA’s Weekly Natural Gas Storage Report showed an injection of 61 billion cubic feet (Bcf) vs. expectations for a gain of 66 Bcf. Stored natural gas now stands at 1.85 trillion cubic feet, which is 12% lower than last year but now slightly above below the five-year average. Supplies of natural gas were slightly lower at 91.4 vs. 92.3 Bcf per day (Bcfd) the prior week. Total demand last week was 88.5 Bcfd, down from 90.6 Bcfd the prior week, with residential usage falling the most. Exports to Mexico rose to 6.5 Bcfd while exports of LNG fell to 11.1 Bcfd from 11.5 Bcfd the prior week.
Rigzone: What were some market surprises?
Donnel: The start of the week saw the U.S. Centers for Disease Control and U.S. Food and Drug Administration jointly announce that a rare form of blood clots was seen in a small number of patients who received the Johnson and Johnson (NYSE: JNJ) vaccine, leading them to recommend a suspension in the administration of this version of the vaccine until their review and analysis of the specific cases could be completed. This headline both calls into question the efficacy of the treatment and creates logistical issues for vaccine distribution, yet oil prices actually rose the day of the announcement.
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