Oil Price Rally Explained

Oil Price Rally Explained
Rigzone's regular market watchers focus on the latest crude oil market moves, inventory trends, demand expectations 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 focus on the latest crude oil market moves, inventory trends, demand expectations 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 oil rebounded this week after hitting February levels last week. The rally was fueled by both fundamental and technical factors. The near-month WTI contract had traded below the lower Bollinger Band for three consecutive days, a buy signal for technical traders, which pushed prices right up to the 21-day Moving Average at $95.30. A major draw-down in gasoline inventories, coupled with the increased use of gasoil for power generation in the EU, were the major fundamental factors sparking higher prices. The latter has been caused by the high price and scarcity of natural gas. Brent crude managed to crest the $100 per barrel level again but has retreated slightly.

This week’s EIA Weekly Petroleum Status Report indicated that inventories of commercial crude increased 5.5 million barrels to 432 million and decreased to four percent below normal for this time of year. The API reported that inventories rose by 2.2 million barrels while the WSJ survey predicted a gain of 200,000 barrels. Refinery utilization unexpectedly rose 3.3 percent to 94.3 percent from 91 percent the prior week. Total motor gasoline inventories decreased by 4.98 million barrels to 220 million barrels, the largest drop in 10 months and falling back to six percent below average. Distillates increased 2.2 million barrels to 111.5 million barrels, or 24 percent below normal.

Crude oil stocks at the key Cushing, OK, hub saw an increase of 723,000 barrels to 25 million barrels, or 33 percent of capacity. Imports of crude were 6.1 million barrels vs 7.3 million barrels the prior week while exports were 2.1 million barrels per day, down from 3.5 million barrels per day the prior week. Exports of finished motor gasoline were 1.1 million barrels per day. U.S. oil production rose to 12.2, the highest level since April 2020, vs 11.2 million barrels per day last year at this time. Volumes withdrawn from the Strategic Petroleum Reserve were 5.3 million barrels, dropping the total inventory to 464.5 million barrels, the lowest level in 37 years. The U.S. oil and gas rig count fell by three last week to 764.

The EIA is forecasting increases in both oil and natural gas production in the U.S. for 2023. Crude supply is expected to average 12.7 million barrels per day vs 11.9 million barrels per day this year. Natural gas will average 100 Bcfd vs 97 Bcfd in 2022. AAA reported that the national average price at the pump for gasoline fell below the $4.00 per gallon mark this week vs $4.19 per gallon last week. Meanwhile, September gasoline futures contracts pushed back over the $3.00 mark on the higher crude prices and the inventory decline.

The rate of inflation slowed last month as both the CPI and PPI came in lower. The primary driver for the decrease was lower energy prices. The U.S. stock market reacted positively with all three major indexes looking to settle higher on the week. The U.S. Dollar is trading lower which is also helping support higher oil prices.

Natural gas prices remain strong in the upper-$8.00s despite a storage report coming in close to normal. The EIA Weekly Natural Gas Storage Report showed an injection of 44 Bcf last week vs a 45 Bcf average and forecasts calling for 39 Bcf. Total stored gas now stands at 2.5 Tcf, around -10 percent vs year-ago levels and -12 percent from the five year average.

Phil Kangas, Grant Thornton Advisory Leader for Natural Resources & Mining: Gasoline witnessed historically high prices this spring, so as expected oil majors like BP marked record profits at the end of this past quarter, raised dividends and boosted share buy-backs. The downward trend in gasoline prices continues for now, with Gasbuddy.com reporting a welcome milestone for consumers of price per gallon slipping below $4 nationally. Still, a study by Standard Chartered showed that the spring surge in prices at the pump had a squelching effect on driving habits, with summer demand reflecting less driving than every other year since 1997, with the exception of 2020. As gas and oil commodity prices have receded in recent weeks, it was no surprise to see rig counts down in the U.S. and Canada in last week’s Baker Hughes survey.

Barani Krishnan, Senior Commodities Analyst at uk.Investing.com: The eye-watering crude builds in the United States for the weeks ending August 5 and July 29 were offset somewhat by last week’s outsized draw in gasoline. But that wasn’t as big a surprise as this week’s announcement by OPEC that it saw less demand for its oil for all of this year, even as the International Energy Agency forecast higher demand. Really, OPEC?

Rigzone: What were some market surprises?

Krishnan: Crude oil inventories jumped by 5.458 million barrels during the week to August 5 against expectations for a build of 73,000 barrels. In the previous week to July 29, crude stockpiles had also risen nearly five million barrels, or by 4.467 million to be precise. Gasoline inventories declined by 4.978 million barrels last week, against expectations for a drop of 633,000 barrels. In the previous week, gasoline rose by 163,000 barrels.

The conflicting data from the U.S. Energy Information Administration naturally left oil markets somewhat directionless on Wednesday, extending the glum mood from last week that took Brent down 14 percent while erasing 10 percent from WTI. Then came OPEC to the rescue. The Organization of the Petroleum Exporting Countries, which usually does all it can to push crude prices up, on Thursday cut its 2022 forecast for growth in world oil demand. 

OPEC said it expects 2022 oil demand to rise by 3.1 million barrels per day, down 260,000 barrels per day from its previous forecast. At a glance, that might really look odd: OPEC degrading oil demand when it always wants higher prices for its producers. One should, however, remember that the cartel is an adept operator when it comes to ‘creating conditions’ for production cuts. In this case, its forecast of lower demand would justify lower output (read: cuts), which would, consequently, boost prices.

The International Energy Agency, meanwhile, said soaring international prices for natural gas could prompt more energy consumers to switch to oil for year-end heating purposes. “Natural gas and electricity prices have soared to new records, incentivizing gas-to-oil switching in some countries,” the Paris-based IEA said in its monthly oil report. It raised its outlook for 2022 oil demand by 380,000 barrels per day.

Thursday’s rally in oil was in contrast to what was happening on the ground. The average pump price of gasoline in the United States, arguably the biggest indicator of real oil demand, was below the key $4 per gallon level on Monday for the first time in months after a record high $5 per gallon in mid-June, which prompted American drivers to exercise more discretion in their fuel usage.

Crude prices also benefited from calls by Wall Street’s top cheerleader for oil — Goldman Sachs — for new highs by the year-end. “Crude oil demand is rising from here,” Goldman said, predicting gasoline prices back at above $5 a gallon and Brent at above $130 by the year-end. 

Kangas: Uncertainty continues to be a major theme of the oil market. Brent and WTI crude were trading below $100 this week, dropping dramatically week over week to levels not seen in several months.   Traders are balancing demand concerns from a possible recession, supply worries from news of OPEC+’s decision to stay the course on production and limited investments upstream from U.S. majors, as well as the complexity driven by the ongoing war in Ukraine. These uncertainties led the U.S. Energy Information Administration’s to revise its Short Term Energy Outlook this week to scale back forecasted production for the balance of this year and for next. 

Seng: Despite the increase in refinery utilization and, lower gasoline exports, there was a sizable draw-down in total motor gasoline inventories.

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

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