Oil Market Outlook Reflects Positive Signals

Oil Market Outlook Reflects Positive Signals
Here is a recap oil and gas market hits and misses for the week ending Dec. 4, 2020.

(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.)

Various factors – from vaccine developments to improving demand in Asia to OPEC’s use of Zoom – are helping to bolster the outlook for the oil market. Keep reading for more detailed explanations about these and other drivers from some of Rigzone’s regular market-watchers.

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

Andrew Goldstein, President, Atlas Commodities LLC: Over the past two weeks the WTI crude oil futures curve has moved back into backwardation, signifying trader bullishness as nearer-term contracts are priced higher than contracts further out on the curve. This happens when the trade has a hard time keeping oil in storage, releasing barrels into the market, signifying current needs for those supplies. Demand worldwide has surpassed expectations, with China and India taking the lead, helping to cut into the worldwide glut of oil that started in March 2020.

Tom McNulty, Houston-based Principal and Energy Practice leader with Valuescope, Inc.: WTI and Brent traded up this week because of two factors. First, the OPEC+ agreement, such as it is, implies some easing of production cuts soon. Second, the vaccine news implies that crude oil demand will increase in 2021.

Barani Krishnan, Senior Commodities Analyst, Investing.com: Both OPEC and the U.S. Energy Information Administration (EIA) surprised markets, though this varied in how they bucked expectations.

Phil Kangas, US Partner-in-Charge, Energy Advisory, Natural Resources and Mining, Grant Thornton LLP: Not surprisingly, improved market conditions reflected the settling dust from the 2020 U.S. election cycle, and growing optimism of COVID-19 vaccinations now expected to be available for initial distribution as early as this calendar year. These factors have been broadly credited for the surging commodity values of WTI and Brent crude. By the end of November, oil prices had regained lost ground at a faster clip than expected. The EIA had reported in its short-term energy outlook early last month that “high global inventory levels and surplus crude oil production capacity (will) limit upward pressure on oil prices, and that Brent prices will remain near $40 per barrel through the end of 2020.”

At the end of last week, however, oil prices reached the highest level since early March. Brent crude closed the week at $48.15, while WTI closed the week at $42.42. In November alone, crude prices (Brent and WTI) increased by roughly a third of their value. However, these commodities still remain well below the pre-COVID price levels.

Mark Le Dain, vice president of strategy with the oil and gas data firm Validere: The U.S. dollar weakening has been one of the rare trades that has played out as forecasters expected. This has been a big tailwind for commodities that could continue with more stimulus.

Rigzone: What were some market surprises?

Krishnan: OPEC managed to keep it together to land a modest production hike despite rallying prices – a situation that might have been unthinkable just a couple of years back.

In analyzing OPEC’s actions, it’s important to understand how far the cartel has come in its 60 years. The cartel has been round the bend too many times before – that is, being eager-beaver to raise production on a $10 hike only to let the market crash $20 later. That’s why it’s being extremely careful this time around. The half-million-barrel adjustment agreed this week appears to be a well-calculated hedge, which the group can pull back anytime.

If anything, the COVID-19 pandemic has enabled the group to be more nimble than any other time in its six-decade history. It can pull together a Zoom meeting at a couple of days’ notice, rather than it taking months at a time for the group to convene in Vienna or some other capital of consensus.

Another positive thing for the cartel is Iran’s tacit agreement to go with any deal struck by the group’s leadership, despite Tehran not having an active role given the prevailing Trump administration sanctions against the Islamic republic. Iran needs to be watched carefully, though, depending how quickly the (projected) Biden administration lifts those sanctions and how much Tehran will add to supply in the near-term.

For now, it appears that OPEC is confident about managing any overruns that come in the near-term, with Saudi Energy Minister Abdulaziz Salman seemingly unperturbed even by Libya’s galloping production.

In other words, OPEC is extremely cautious but also looks more confident than ever of being able to turn the situation into its own favor.

With the EIA’s weekly data, the crude draw number of the 700,000 barrels it put out was way out of whack with the 4 million-barrel build forecast by industry group American Petroleum Institute (API). Notwithstanding the API’s forecast, analysts in the market were expecting a decline in crude stockpiles during the Halloween week. But decline reported by the EIA was less than a third of their consensus.

The surprise didn’t end there. The EIA also had a gasoline build of at least 1.2 million barrels more than analysts’ consensus and a huge, unexpected rise of 3 million barrels net in diesel-led distillate inventories. The gasoline build might be pretty consistent with the kind of lower fuel demand you see a this time of year, with so few people taking road trips with the cold weather and the COVID-19 changing the entire dynamics of travel. But the build in distillates was of concern, given the diesel demand that’s typical for trucking and other delivery services ahead of the year-end holidays.

Also, U.S. production was up a second week in a row, crossing 11 million barrels per day (bpd), though for the week it rose by just 100,000 bpd.

Despite the less-than-stellar inventory numbers for oil bulls, U.S. crude prices rose for the week as investors remain fixated on the market breaking free of the pandemic in coming months from a breakthrough in vaccines.

McNulty: I thought the absence of meaningful mergers and acquisitions (M&A) news was odd because there is a great deal of activity behind closed doors in terms of “deal flirting” across the energy complex. There are still too many oilfield services (OFS) and upstream companies competing against each other. It is true that valuations have made consolidation deals unattractive, but they need to happen.

Kangas: Historically, there is a negative correlation between crude oil prices and EIA DOE (U.S. Department of Energy) inventory changes. The DOE reported a crude draw of 0.754 million barrels (MMbbl) versus an expected build of 0.234 MMbbl, decreasing inventories to 488.721 MMbbl. This comes as industry observers saw a 0.754-MMbbl draw in U.S. crude inventories for the week ending Nov. 20. The modulation of direct changes in oil prices from weekly inventory draws may have a number of contributing factors. Among these are from the anticipation of broader supply uncertainty based on OPEC+ meeting (in)decisions, and from investor recognition that vaccine optimism may have artificially increased prices in the short term.

Le Dain: OPEC switching to a monthly meeting cadence for output increases or decreases going forward was a positive market surprise. This is helpful as it will allow the market to look past the hiccups in Q1 and toward a vaccine, as participants will assume a more proactive balancing effort in the intermediate months.

Goldstein: WTI crude oil is 37 percent higher off the Nov. 2, 2020, close to $34, mostly due to the potential success of future vaccines for COVID-19. With the number of cases, hospitalizations and deaths rising on a daily basis, I’m surprised the demand for crude oil is at the current levels.

To contact the author, email mveazey@rigzone.com.


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