Oil Markets Remain Volatile

Oil Markets Remain Volatile
Rigzone's regular market watchers look at OPEC's latest forecast, continuing U.S. Gulf of Mexico outages, price movements and more.

(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 look at OPEC’s latest forecast, continuing U.S. Gulf of Mexico outages, price movements 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: The week started on a bullish note as OPEC forecasted global demand in 2022 will increase by 4.2 million barrels per day to 101 million barrels per day, higher than pre-pandemic levels. The cartel left unchanged its 2021 demand forecast at 96.6 million barrels per day. WTI crested the $73.00 mark on Thursday while Brent fell short of nearing the $76 level as U.S. Gulf of Mexico producers and refiners continued to return to full operations at the same time exports of crude strengthen. Earlier in the week, as much as 50 percent of Gulf of Mexico oil and 54 percent of natural gas production remained offline, according to the U.S. Bureau of Safety & Environmental Enforcement. Tropical Storm Nicholas brought strong winds and torrential rainfall which hampered those start-ups. Mid-September is the traditional ‘peak’ of hurricane season. Refined product movement on the Colonial Pipeline was temporarily halted due to flooding caused by then Hurricane Nicholas. China provided some bearish signals as their economic growth has waned and as their government made the decision to release 7.4 million barrels of their strategic petroleum reserves in response to the U.S. GOM outages. Meanwhile, the Petroleum Association of Japan sees the possibility of that country burning more oil as LNG import prices have soared past $20/MMBtu. And, India, the world’s third largest oil importer, has seen an economic rebound as Covid-19 cases and related deaths have fallen.

The U.S. national average price for gasoline hit $3.19/gallon this week, a seven year high. Meanwhile, Phillips66 announced that it may not rebuild its Alliance Refinery in Louisiana after it suffered Ida-related damage. This week’s EIA Weekly Petroleum Status Report continued to reflect both the supply and refining outages caused by Hurricane Ida. Commercial oil inventories decreased by -6.4 million barrels while industry analysts were calling for a -2.5 million barrel drop. The API reported that inventories decreased by -5.4. Total crude stored now sits at 417 million barrels, dropping to seven percent below the five year average for this time of year. Refinery utilization was 82.1 percent vs. 81.9 percent the prior week. Total motor gasoline inventories saw a decline of -1.9 million barrels, holding at four percent below the five year average for this time of year. The API had called for a decrease in gasoline stocks of -2.8 million barrels. Distillate inventories decreased by -1.7 million barrels and have now fallen to 13 percent below the five year average. Crude oil stocks at the key Cushing, OK. Hub fell by -1.1 million barrels to 35.3 million barrels or about 46 percent of capacity there. 529,000 barrels was withdrawn from the U.S. Strategic Petroleum Reserve representing the first volume of ‘borrowed’ oil for Louisiana refineries. U.S. oil production only rose +100K barrels per day to 10.1 million barrels per day. Pre-Ida production had reached 11.5 million barrels per day.

The U.S. economy failed to help support crude prices as the Dow, S&P and NASDAQ are all lower on the week in part, due to a market decline in China. The U.S. Dollar has traded higher, however, which may place a ceiling on crude prices.

Jon Donnel, Managing Director, B. Riley Advisory Services: Oil markets remained volatile but received a positive jolt midweek on the U.S. inventory report showing a significant draw of crude stocks. Production in the Gulf of Mexico knocked offline during Hurricane Ida has been slow to restart, hampered by the impacts of Hurricane Nicholas early this week. Demand has ticked down over the past couple of weeks, partially attributable to the storms and the end of driving season, but the four week average total products supplied data from the EIA shows total demand is still over 21 million barrels per day, up almost 17 percent year over year and more or less in line with 2019 levels. Good signs for commodity prices moving forward.

Tom McNulty, Houston-based Principal and Energy Practice Leader with Valuescope, Inc: Chevron’s commitment to the energy transition has become larger. It just announced that it will raise its capital investment from $3 billion to $10 billion. This is consistent with what we are seeing across the complex. So-called ‘Big Oil’ can make substantial and meaningful investments in clean energy technology and projects, while at the same time continuing to operate their traditional energy business. Regardless of what form the energy transition will take, and at what velocity it will develop, it will be driven by existing energy companies.      

Rigzone: What were some market surprises?

Barani Krishnan, Senior Commodities Analyst at investing.com: The fact that outages from Hurricane Ida continue to roil the market remains a surprise. As of Thursday, some 18 days after the storm’s landfall, some 513,878 barrels equivalent of oil, or 28.24 percent of the production in the U.S. Gulf Coast of Mexico remained shut-in, according to the Bureau of Safety and Environmental Enforcement, the government agency responsible for keeping track of this. I don’t think anyone in the market had anticipated such a lengthy fallout from a hurricane, which despite its initial intensity, was downgraded to a tropical storm upon contact with land. The main reason for U.S. crude prices returning to the $72 handle is because of the continued disruptions to production from Ida. It was also why U.S. crude stockpiles saw an outsized drawdown of 6.4 million barrels for last week, versus a forecast of 3.5 million and a previous deficit of 1.5 million.

Seng: The market continues to act as if the spread of the Covid-19 variant is a non-issue while horror stories about a lack of hospital beds abound. Natural gas price levels continue to amaze.

Donnel: U.S. natural gas directed rig counts fell by one last week and the count has essentially been stuck at approximately 100 since early May when front-month prices had yet to reach $3.00/mmbtu. Prices have steadily ramped higher over that time, reaching a high of $5.65/mmbtu this week, but activity remains stubbornly flat. This is all the more surprising given U.S. storage levels that are 16 percent below last year and seven percent below the five-year average. These price and storage levels historically would have been clear signals to add rigs, but capital discipline has remained the primary focus for the operators.

Mcnulty: Given Total’s very loud commitment to the energy transition, the deal that was announced with Iraq this week raised some eyebrows, because it will cause crude oil production from Iraq to rise. But the details show that this commitment includes a variety of clean energy investment as well. There will be a very large solar project as part of this deal, and anti-flaring investments, among other items. In many ways old energy is being used to fund new energy.

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

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