Oil Prices Hit Levels Not Seen Since April

Oil Prices Hit Levels Not Seen Since April
Rigzone's regular market watchers focus on this week's oil price drop, inflation, inventory levels 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 this week’s oil price drop, inflation, inventory levels 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: WTI and Brent crude both settled this week at price levels not seen since April on ever-increasing concerns over possible recession, inflation and the U.S. Federal Reserve’s plans to curb it. At one point Thursday, both grades were trading at February prices with WTI breaching $91 per barrel and Brent hitting a low of $94.50 per barrel.

U.S. inflation reached a 40-year high of 9.1 percent in the latest report which could result in a more aggressive move by the Fed, giving traders renewed concerns over slower economic growth ahead. The Russian/Ukraine conflict is now seen as hurting Europe’s economic outlook as well. Meanwhile, the continuation of Covid lockdowns in China only exacerbated worries about crude oil demand. Across-the-board increases in crude and petroleum product stocks last week added to the bearish moves lower but a large SPR sale countered some of that action. Meanwhile, U.S. President Joe Biden’s trip to Saudi Arabia is generally not expected to result in any increased oil output from the kingdom.

This week’s EIA Weekly Petroleum Status Report indicated that inventories of commercial crude increased 3.25 million barrels to 427 million, increasing to just five percent below normal for this time of year. The API reported that inventories rose by 4.8 million barrels while the WSJ survey predicted a gain of 1.4 million barrels. Refinery utilization rose slightly from 94.5 percent to 94.9 percent. Total motor gasoline inventories increased by 5.8 million barrels to 225 million barrels, climbing to five percent below average. Distillates increased 2.7 million barrels, shrinking to 18 percent below normal. Crude oil stocks at the key Cushing, OK, hub saw a modest increase of 315,000 barrels to 21.6 million barrels, or 28 percent of capacity. Imports of crude were 6.7 million barrels, vs 6.8 million barrels the prior week, while exports were 3.0 million barrels per day. Total refined product exports were 5.8 million barrels per day. U.S. oil production slipped from 12.1 million barrels per day to 12.0 million barrels per day vs 11.4 million barrels per day last year at this time. Volumes withdrawn from the Strategic Petroleum Reserve were 6.9 million barrels, dropping the total inventory to 485 million barrels. The U.S. Department of Energy awarded new sales of oil from the SPR to 15 companies totaling 39 million barrels. Deliveries will take place from mid-August through the end of September. The U.S. oil and gas rig count rose by two last week.

Crude output by the OPEC+ group is lagging behind stated targets with June production coming in at 24.8 million barrels per day vs a goal of 25.9 million barrels per day. OPEC is forecasting an increase of 710,000 barrels per day in U.S. shale oil output next year, down from this year’s 880,000 barrel per day gain. The cartel also predicts global demand will rise 2.7 million barrels per day in 2023. Meanwhile, the IEA sees the global oil crisis as slowly easing since economic woes are translating into less demand.

AAA reported that the national average price at the pump for gasoline is $4.605 per gallon this week vs $3.147 per gallon at this time last year. While at the same time, demand for gasoline is actually the lowest since June 2021, which appears to be mainly due to more people working from home and not the higher prices. U.S. pump prices have been falling steadily now since mid-June.

All three major stock indexes look to be lower on the week on recessionary concerns as well. Weak bank earnings didn’t help that perspective. Traders continue to be caught in the ‘curb inflation but don't cause recession’ conundrum. They realize the Fed needs to take action to reel-in inflation which is at a 40-year high but they continue to fear increased inflation rates will stifle economic growth. The U.S. Dollar Index has been holding near parity with the euro for the first time in 20 years while rising to its highest level since October 2002. However, this serves to diminish the EU currency’s buying power which impacts purchases of all U.S. exports, including oil.

While certainly not near the lofty prices experienced last month, Henry Hub natural gas has stayed well above the $6.00/MMBtu level again this week as power generation demand continues and despite a somewhat bearish inventory report. The EIA’s Weekly Natural Gas Storage Report showed an injection for last week of 58 billion cubic feet vs analysts’ predictions of +61 billion cubic feet but more than the +55 billion cubic feet five-year average injection for this time of year. Total gas in storage now stands a 2.37 trillion cubic feet, -10 percent vs last year and -12 percent vs the five-year average. It would appear that, despite the prolonged heat in some areas of the U.S., the domestic demand has not absorbed all of the 2.0 billion cubic feet per day gained by the closure of the Freeport LNG export facility.

Barani Krishnan, Senior Commodities Analyst at uk.Investing.com: Actually, nothing went the way oil bulls thought it would this week, meaning all the surprises (pleasant ones, actually) were for the bears in the market. It included weekly U.S. oil inventory data to CPI numbers data showing another runaway inflation print and now bets over July rate hikes that could be even higher than June’s.

Rigzone: What were some market surprises?

Seng: Inventories of oil and petroleum products are still at historically low levels despite recent gains … Yet traders are forcing a bearish outlook for demand based upon recession fears that have yet to materialize. In fact, they may be creating a scenario whereby lower energy prices could ease inflation and negate the need for aggressive interest rate moves by the U.S. Fed. Demand for natural gas for summer power generation is shrinking the seasonal spreads making storage plays impossible for arbitragers. Utilities, on the other hand, have to fill storage ahead of winter regardless of the price.

Krishnan: The across-the-board build in U.S. crude, gasoline and distillate stockpiles for the week ended July 8 were the first in a while and marked a definitive bearish shift in summertime oil demand. That came on the same day as the CPI data that showed new four-decade highs in U.S. inflation, which grew 9.1 percent for the year to June. Since then, investors have vexed over what the Fed could decide on for rates at its July 27th meeting. The consensus is still 75 basis points though a record 100 basis points can’t be ruled out altogether. The impact of the financial trade on oil has been telling with WTI almost breaking below $90 a barrel in Thursday’s trade. The next test of $85 and below isn’t far away.

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

What do you think? We’d love to hear from you, join the conversation on the Rigzone Energy Network.

The Rigzone Energy Network is a new social experience created for you and all energy professionals to Speak Up about our industry, share knowledge, connect with peers and industry insiders and engage in a professional community that will empower your career in energy.

Most Popular Articles