Oil May Have Risen Too Far Too Fast
(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)
This week, one of Rigzone’s regular market watchers takes a look at oil price moves, the latest OPEC+ decision, crude inventories 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: Crude prices advanced for four straight days this week as all eyes were on this week’s meeting of the OPEC+ group. Speculation became reality as the consortium did resolve to lower its total output by 2.0 million barrels per day. WTI jumped towards the $90 per barrel mark while Brent rose to just shy of $95. In the past few months, oil prices have slipped due to concerns about possible global recession that would hurt demand. Additionally, interest rate hike decisions by the US Federal Reserve have strengthened the US Dollar, causing foreign investors to retreat. The proposed cut is the largest made by the coalition since the demand destruction caused by the pandemic. The group is evidently targeting $90 per barrel as a floor to support the 2023 fiscal year budgets for several of its member countries. Market observers are leery that the actual reduction in output will equate to 2.0 million barrels per day since it’s been widely known that the group has been under producing for several months, now. Additionally, the key weekly inventory report showed across-the-board declines, adding more support to the rally.
This week’s EIA Weekly Petroleum Status Report indicated that inventories of commercial crude declined by 1.35 million barrels to 429 million, slipping to three percent below normal for this time of year. The API reported that inventories dropped 1.78 million barrels while the WSJ survey predicted an increase of 1.3 million barrels. Refinery utilization rose to 91.3 percent from 90.6 percent the prior week. Total motor gasoline inventories decreased by 4.7 million barrels to 207.5 million barrels, dropping to nine percent below average. Distillates decreased 3.4 million barrels to 111 million barrels, now at 21 percent below normal. Crude oil stocks at the key Cushing, OK, hub rose 27,000 barrels to 26 million barrels, or 34 percent of capacity. Imports of crude were 6.0 million barrels per day, down 500,000 barrels from 6.6 million barrels per day prior week, while exports were 4.55 million barrels per day, down from 4.64 million barrels per day. Exports of refined products were 6.0 million barrels per day. Volumes withdrawn from the Strategic Petroleum Reserve were 6.2 million barrels, which dropped the total inventory to 416 million barrels. US oil production held at 12.0 vs 10.3 million barrels per day last year at this time.
Despite the plan to reduce output, Saudi Arabia has lowered the price of oil it sells to Europe while increasing the price to the US, which imports about 500,000 barrels per day from the Kingdom. Gasoline prices have been increasing for the past 14 days due to tight supplies. The national average at the pump has risen back up to $3.87 per gallon. All three major stock indexes attempted a rally this week but fell back when it became apparent that the Fed won't be taking a break in interest rate hikes. The Dow pierced the critical 30,000 mark. The US Dollar continues to be strong but has not hurt oil prices this week.
Natural gas marched upward and exceeded the $7.00/MMBtu mark this week only to fall-off later on a bearish storage report and forecasts for lower temperatures. The EIA Weekly Natural Gas Storage Report showed an injection of 129 Bcf last week vs forecasts calling for +114 Bcf, last year’s +86 Bcf and a five-year average of +87 Bcf. Total gas in storage now stands at 3.1 Bcf, -5 percent vs last year and -8 percent vs the 5-year average. Some of the higher volume injected was attributed to the loss of power generation in Florida caused by Hurricane Ian. Cheniere LNG broke ground on the third phase of their Corpus Christi facility this week with expected completion in 2025.
Rigzone: What were some market surprises?
Seng: The near $8.00 per barrel increase in WTI prices this week for November futures contracts was somewhat surprising since the actual cuts won’t be known for some time. Given the OPEC+ groups history of non-compliance, we may not see near the reduction in output announced.
Rigzone: What developments/trends will you be on the lookout for next week?
Seng: Crude prices may have risen ‘too far, too fast’ this week and we may see some profit-taking selling next week. Prices are now above all three of their short-term moving averages.
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