OPEC+ Jolt and Inventory Data Trump Virus Variant Fears

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The impasse within the OPEC+ alliance of major oil producers, along with new data on U.S. crude inventories, proved to be bigger drivers of the oil market this past week than concerns about the spread of a new variant of COVID-19. So say three of Rigzone’s regular market-watchers. Keep reading for their perspectives on oil and gas market developments from the past week.

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: West Texas Intermediate (WTI) has been holding steadily in the $70s for weeks now and looks to post a weekly gain as an OPEC+ “head fake” and bullish inventory reports overrode growing concerns about the spread of the COVID-19 virus and its delta variant. The U.S. standard hit $77 per barrel this week, a level not seen since October 2018 while Brent flirted with the $78 level during the holiday-shortened trade week.

The OPEC+ group postponed last week’s meeting twice and canceled Monday’s altogether as Saudi Arabia and the United Arab Emirates disagree on output increases. The UAE has taken the position that future demand for oil will diminish rapidly, and they would like to produce full-out while prices are favorable. Their “Let’s make hay...” stance has the group at a standstill on further increases at the moment. The lack of a decision by OPEC+ gave oil markets their momentum to make a run at the week’s highs. Meanwhile, Saudi Arabia increased its price for August crude sold in Asia – a sign that the Kingdom believes the current supply/demand balance is tight enough to support higher prices. On the bearish side, the market must now keep an eye on the potential resurgence of COVID-19 and its delta-variant. Japan declared a coronavirus emergency and the International Olympic Committee has now banned spectators from this year’s events.

A very bullish inventory report this week helped oil rebound from an apparent profit-taking plummet mid-week. The U.S. Energy Information Administration (EIA) Weekly Petroleum Status Report indicated that commercial oil inventories decreased by 6.9 million barrels while analysts were calling for a 6.2-million-barrel drop. The American Petroleum Institute (API) reported that inventories were 8 million barrels lower. Total crude stored now sits at 445 million barrels, falling to 7% below the five-year average for this time of year. Refinery utilization was 92.2% vs. 92.9% the prior week. Total motor gasoline inventories saw a substantial decrease of 6.1 million barrels and are now 2% below the five-year average. The API had called for an increase in gasoline stocks of 2.7 million barrels. Distillates rose by 1.6 million barrels, 6% below the five-year average, while the API had reported a 1-million-barrel gain in inventory. Crude oil stocks at the key Cushing, Okla., hub fell by 610,000 barrels to 39.6 million barrels, or 52% of capacity there. U.S. oil production increased by 200,000 barrels per day (bpd) to 11.3 million bpd. Domestic U.S. crude supply is now above the year-ago level of 11 million bpd. Additionally, there was another draw of about 1.2 million barrels from the Strategic Petroleum Reserve.

Production has not increased substantially despite prices exceeding $60 per barrel for three months now. However, there were approximately 250 drilled-but-uncompleted wells (DUCs) completed from April to May. With this week’s oil rally, Brent/WTI spreads collapsed to less than -$1 per barrel at one point but currently stand at about -$2. While this tight spread is not conducive to exports, U.S. oil producers are still benefiting from these higher prices domestically.

As a further indication of the impact COVID-19 had on energy consumption, the EIA reported that fossil fuel demand in 2020 fell to the lowest levels since the agency began collecting data back in 1949. Less driving miles and a winter that was warmer-than-normal on average were given as the main reasons. Global oil demand in particular had dropped from about 100 million bpd to 80 million bpd at the depth of the coronavirus-induced reduction in consumption. Currently, global oil use has rebounded to around 94 million bpd.

The Dow, S&P, and NASDAQ are all trading in record territory again, exceeding their previous highs and giving a boost to the future outlook for energy demand. Meanwhile, the U.S. dollar is lower, further helping to support oil prices.

Natural gas continues to trade at traditionally wintertime levels as low inventory replenishment and record heat have increased demand. The EIA’s Weekly Natural Gas Storage Report showed an injection of 16 billion cubic feet (Bcf) vs. analysts’ forecasts calling for a gain of 33 Bcf and the five-year average of 63 Bcf. Stored natural gas now stands at 2.57 trillion cubic feet (Tcf), 17.6% lower than last year and 7% below the five-year average. Presently, the market would need to average an injection of about 84 Bcf per week to hit 4 Tcf by the start of next winter. Supplies of natural gas decreased to 92 Bcf per day (Bcfd) from 92.6 Bcfd the prior week. Total demand last week was 87.8 Bcfd, down from 90.8 Bcfd the prior week, with the main decrease coming from the power generation sector. Exports to Mexico were 6.3 Bcfd while exports of LNG were lower at 10.9 Bcfd.

Jon Donnel, Managing Director, B. Riley Advisory Services: U.S. consumers continue to hit the road this summer, with weekly gasoline demand topping 10 million barrels per day for the week ended July 2, representing an all-time high for weekly figures dating back to 1991. Crude stocks fell by almost 7 million barrels and days of supply have dropped by about 35% since mid-March and stand within one day of levels at the same time in 2019. The demand side of the equation has a solid fundamental foundation and will be supportive of commodity prices.

Barani Krishnan, Senior Commodities Analyst, Investing.com: The U.S. having another week of huge crude inventory draws wasn't a surprise. But OPEC+'s failure to reach an output agreement for August was certainly a mega-surprise for the oil market, particularly the festering Saudi-UAE fight that's blown out in the open.

Rigzone: What were some market surprises?

Donnel: OPEC+ threw the commodity markets a curve ball by failing to reach an agreement on near-term production. The group reached an impasse as the UAE called for increases to their baseline production levels before they would agree to new targets beyond the end of the year and the meeting was cancelled without consensus regarding August supply. The turmoil originally pushed prices to new highs as the expected 400,000 barrel per day monthly increases are not obviously going to happen, but the lack of a unified agreement suggests members could add even more supply to the market, which moved WTI back to the low $70s before settling around $74 as of this writing. The price volatility is a clear indication of the influence the cartel still has over the oil markets, but the fact that crude is trading at the same level as the day before the meetings started demonstrates how robust oil demand is as markets continue to recover from the pandemic.

Krishnan: The Saudi-UAE row at the apex of OPEC+ has huge ramifications for the price of oil going forward. Thanks to the dispute, no one can say with certainty now how much the Saudis, who don't intend to lose a barrel of market share if they can afford it, will produce next month. Equally, or perhaps more, worrying is the Emiratis’ output since they were the ones who raised a fuss in the first place about having their production stifled by artificially set lows during the pandemic. Even worse, no one can even hazard a guess what the rest of the 23-nation coalition called OPEC+ will now produce for August – since it might be a free-for-all where output quotas are concerned.

To contact the author, email mveazey@rigzone.com.