Oil Prices Getting Boost from Fuel Switching

Oil Prices Getting Boost from Fuel Switching
Rigzone's regular market watchers examined commodity price developments, the latest OPEC+ meeting outcome, ESG trends 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 examined commodity price developments, the latest OPEC+ meeting outcome, ESG trends 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: Both WTI and Brent traded off their multi-year highs set this week but are still headed for a gain week over week. The U.S. crude benchmark set a seven year high this week while running towards $80 but falling just short. Meanwhile, Brent managed to hit $83.50, a three-year high. Any expectations that the OPEC+ group would increase their output quotas in response to global shortages and higher prices were squelched after their Monday meeting. The cartel and friends are maintaining their planned 400,000 barrel per day monthly increases, which will eventually restore 3.2 million barrels per day of cuts made previously, despite calls from the U.S. government to increase production. Global oil prices are also getting a boost from fuel-switching as natural gas scarcity is pushing prices as high as $30/MMBtu resulting in industrial and power generators turning to refined products. Some key technical indicators have served to keep a cap on the rally this week as prices may have risen ‘too high, too fast’ and some retracement was bound to happen. Russian president Putin’s announcement that they could supplement Europe’s energy needs caused crude prices to fall back only temporarily and the rally continued Thursday. The possible release of oil from the U.S. Strategic Petroleum Reserve hinted at by the U.S. Secretary of Energy won’t happen at this time.

This week’s EIA Weekly Petroleum Status Report led to lower prices Wednesday as the government  indicated that commercial oil inventories increased by 2.35 million barrels to 421 million barrels, seven percent below the average for this time of year. The API reported that inventories increased by 950,000 barrels while WSJ analysts called for inventories to remain flat on average. Refinery utilization rose to 89.6 percent from 88.1 percent the prior week. Total motor gasoline inventories saw an increase of 3.25 million barrels and are now down to just one percent below the 5-average for this time of year. Distillate inventories increased by 400,000 barrels and have now fallen to 11 percent below the five year average. Crude oil stocks at the key Cushing, OK. Hub rose 1.55 million barrels to 35.5 million barrels or about 47 percent of capacity there. 920,000 barrels was withdrawn from the U.S. Strategic Petroleum Reserve. U.S. oil production rose 200,000 barrels per day to 11.3 million barrels per day as more Gulf of Mexico production returns. Last year at this time, U.S. crude production was 11 million barrels per day.

Retail gasoline in the U.S. also hit a seven year high as it climbed to $3.22/gal while November futures hit a seven year high of $2.37/gal. The major U.S. stock market indicators were on a rollercoaster ride this week as the threat of a government default loomed large due to the Democratic/Republican standstill over the debt ceiling. The Dow, S&P and NASDAQ fell early week only to gain on news that the GOP would compromise on a short-term extension of the debt ceiling. That news, along with a weaker U.S. dollar, helped crude regain the losses from the inventory report.

Jon Donnel, Managing Director, B. Riley Advisory Services: The OPEC+ meeting this week resulted in the group holding to its prior plan to add 400,000 barrels per day of production back into the market in November, sending crude prices to new highs with WTI approaching $80 per barrel before the relatively bearish U.S. inventory report served to temper the commodity markets midweek. OPEC+ noted caution regarding the potential for Covid to negatively impact demand heading into winter, but current prices suggest that this is more than offset by the increasing likelihood of fuel switching for power and heating as natural gas shortages and supply chain issues persist across Europe and Asia.

Tom McNulty, Houston-based Principal and Energy Practice Leader with Valuescope, Inc: It looks like OPEC+ will stick to its 400,000 barrel per day production increase and resist calls to make that number larger. The reason it is not a surprise is because they are making more money at these higher prices and do not want to do something that might cause a price retreat. This also illustrates that OPEC+ can, and will, ignore requests from Europe and the U.S. to increase production.

Gerrad Heep, Grant Thornton National Partner in Charge of Energy – Audit: The focus on ESG implementation and the resulting internal and external reporting continues to increase, most notably the “E”, or Environmental, for fossil fuel companies. It is nearly impossible to attend a business or financially focused energy conference without ESG being at least mentioned. Last week, Grant Thornton hosted its annual Energy Symposium. Of the Symposium’s six sections, one was dedicated to ESG and ESG’s impact to the applicable topic was discussed in four of the other five.

Rigzone: What were some market surprises?

Seng:  The OPEC+ group not increasing output with Brent prices in the low $80s was surprising along with record high prices in the UK and Europe for natural gas.

Donnel: Energy Secretary Granholm suggested this week that the administration may be open to supporting releases of the strategic petroleum reserve or even a lifting of the export ban in the latest attempt to mitigate high prices at the pump. Commentary on the export policy was a bit out of left field and would likely have little impact towards achieving the desired effect. U.S. refineries are optimized for a heavier slate than the shale barrels that are currently exported, and global supply chains could do without any more abrupt changes.

Mcnulty: I thought that Japan’s announcement that it will restart some of its nuclear power, in order to support its expansion of renewable energy development efforts, was very interesting. It shows that reliable baseload power, such as nuclear, is still pretty critical for a modern industrialized grid to work while renewable energy capabilities are growing. Plus, it doesn’t hurt that nuclear power is essentially a zero-emission power generation option.

Heep: It was not a surprise that the price of WTI and Brent continued to be stable. The very bullish outlook by some for the price of crude is somewhat surprising. There is a sentiment that 1) continued government spending, 2) increase in demand for products and services and 3) a supply chain that can’t keep up with the demand will result in much higher inflation. Under this scenario, it is theorized that crude prices could reach $100 or more in 2022. 

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

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