Pluses Adding Up on Crude Supply Side

Pluses Adding Up on Crude Supply Side
Here is a review of oil and gas market hits and misses for the week ending April 30, 2021.

(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.)

Several supply-related factors are supporting crude oil prices, according to one of Rigzone’s regular market-watchers. Read on for a sampling of the bullish signals, along with additional insights about other timely developments, in this review of recent oil and gas market hits and misses.

Rigzone: What were some market expectations that actually occurred during the past week – and which expectations did not?

Jon Donnel, Managing Director, B. Riley Advisory Services: The U.S. E&P industry has consistently indicated that free cash flow generation and balance sheet strength will take precedence over production growth, and there were a number of confirmations this week. Rig and frac spread counts both appear to be plateauing near levels that will support U.S. production consistent with 2020 exit rates. Service companies noted their customers’ capital discipline on recent earnings calls and were generally forecasting modest topline growth into the second quarter. Both ExxonMobil and Chevron maintained capital spending ranges for the year in their press releases this morning, despite oil prices reaching levels above the upside cases embedded in the original plans. These are all positive signs for the supply side of the crude price equation.

Barani Krishnan, Senior Commodities Analyst, OPEC+’s decision not to have its April meeting and push it forward to June 1, was certainly a surprise.

Even more surprising, was the cartel’s determination to ease production cuts in May through July – as planned – despite the COVID catastrophe in the third-largest oil buyer, India, and the worsening state of the pandemic in No. 4 crude importer Japan.

So far, OPEC+’s wager seems to have worked, with crude prices rising (at the time of writing) to $65 per barrel for U.S. WTI and around $68 for London’s Brent.

The oil rally has been helped by an unexpectedly low U.S. crude build reported for last week, versus the high build surprise many thought may happen – count that as the one that did not pan out.

Tom Seng, Director – School of Energy Economics, Policy and Commerce, University of Tulsa’s Collins College of Business: Bearish signals for oil existed throughout the week but were ignored by traders until today. Even so, both Brent and WTI will settle higher than last week. WTI crested at above the $65 level mid-week but failed to exceed the high posted on March 16 which caused some technical selling.

Prices rose Tuesday on news that the OPEC+ group canceled their planned Joint Ministerial Monitoring Committee (JMMC) meeting for Wednesday, leaving current output plans in-place. Earlier in the month, the group decided to gradually increase output by 1 million barrels per day (bpd) over the May/June period. Saudi Arabia alone will increase production by 250,000 bpd. While an increase in output is certainly “bearish,” the market read the status quo decision as “bullish.” Additionally, the OPEC+ group believes the market can handle this increase despite the worsening of the COVID situation in India, the world’s 3rd-largest importer of oil. And global gasoline demand is expecting to increase this summer.

By week’s end, however, the market indicated concern over the rising number of COVID cases in India and the U.S. dollar strengthened on positive economic indicators, creating a bearish retracement for prices.

A slight increase in U.S. refinery activity, coupled with a “spot on” addition to crude inventory, fueled the rally on Wednesday. The Weekly Petroleum Status Report indicated that commercial oil inventories increased by a mere 100,000 barrels, which happened to match the average forecast by industry analysts. However, it was far below the American Petroleum Institute’s 4-million-barrel gain. Total crude stored now sits at 493 million barrels, right at the five-year average for this time of year.

Refinery utilization rose 0.4% to 85.4% from 85% the week prior. Total motor gasoline inventories increased by 100,000 barrels and are now at 3% below the five-year average, with the summer driving season starting at the end of next month. Distillates decreased by 3.3 million barrels and are also at the five-year average. Crude oil stocks at the key Cushing, Okla., hub rose 722,000 barrels to 46.7 million barrels – or 61% of capacity there. U.S. oil production decreased by 100,000 bpd to 10.9 million bpd. Additionally, there was a draw of about 1.5 million barrels from the Strategic Petroleum Reserve. Looks like “Uncle Sam” may be taking advantage of the higher oil prices as well.

Crude oil production in Alaska fell to about 500,000 bpd last year, the lowest level since 1976 and down 75% from the peak of 2 million bpd in 1988.

The Dow is off from its 34,000+ peak earlier in the month while the S&P and NASDAQ charted new highs this week but are down today. The NASDAQ remains below the high set last month. While off of its earlier month highs, the U.S. dollar is higher today as the U.S. gross domestic product grew by over 6% in the first quarter and both personal income and spending were up last month. Personal income increases were more than likely due to the distribution of stimulus checks.

Gasoline prices in the U.S. are creeping toward the $3 mark, with the national average now sitting at $2.96 per gallon. In addition to higher crude prices, a shortage of tanker drivers could make retail deliveries harder this summer – further increasing the cost per gallon. Due to the dramatic decrease in demand for gasoline last year, many truck drivers were laid-off and have not returned. Many have been drawn over to the increasing shipping markets that have been buoyed by increased Internet buying during widespread lockdowns.

Natural gas prices continue to receive support from some late springtime cold air and meager storage injections. Additionally, the EU acknowledge the role natural gas will play during the transition to “greener” energy use, setting the stage for increasing global demand. May natural gas futures settled Wednesday at $2.905 while June is trading over the $2.90 mark.

The EIA’s Weekly Natural Gas Storage Report showed an injection of 15 billion cubic feet (Bcf) vs. expectations for a gain of 13 Bcf. This compares with last year’s 66 Bcf and the five-year average of 67 Bcf, which provided some of the support for the week’s rally. Stored natural gas now stands at 1.9 trillion cubic feet, which is 14% lower than last year but now 2.1% below the five-year average.

Supplies of natural gas increased to 91.4 from 90.6 Bcfd the prior week. Total demand last week was 90.4 Bcf per day (Bcfd), down from 95.3 Bcfd the prior week, with residential usage falling the most. Exports to Mexico lowered to 6 Bcfd while exports of LNG fell to 11.3 Bcfd from 11.6 Bcfd the prior week.

Rigzone: What were some market surprises?

Mark Le Dain, vice president of strategy with the oil and gas data firm Validere: Pretty exciting to see Vitol purchase a Permian asset at the end of this week. You have a global firm with visibility into crude demand making its first U.S. shale purchase. That seems much more bullish than them coming out and saying the market is going to be tight … which they’ve also done.

Donnel: OPEC+ unexpectedly decided to postpone its scheduled meeting this week until early June. While it is certainly not unprecedented for the itineraries of these gatherings to get adjusted, it was surprising to see the group essentially agree to roll over the monthly production increase plan from the prior meeting, particularly given the contention between members over the past year regarding quotas and the demand implications of rising COVID case counts across the globe. The market took the news as a sign that the overall demand outlook remains positive, driving crude prices towards recent peak levels.

Krishnan: Despite the COVID situation in India, and Japan – where a state of emergency has been announced less than 90 days from the Tokyo Olympics – Russian Deputy Prime Minister Alexander Novak said crude prices are “in a good place, and demand is increasing.” The remarks by the second-most powerful person in OPEC+ were certainly audacious, and time will tell how right he is.

For now, OPEC+ is sticking with its plans to pump an additional 350,000 bpd in May and June, and a further 400,000 barrels daily in July. It will be the group’s first meaningful production hike in a year, after it had withheld at least 7 million bpd in output since April 2020.

The U.S. Energy Information Administration, meanwhile, reported that crude inventories in the country only rose by 90,000 barrels last week, compared with analysts’ expectations for a build of 659,000 barrels.

Distillate stockpiles, which include diesel and heating oil, fell 3.342 million barrels for the week ended April 23, against expectations for a draw of 648,000 barrels, the EIA said.

Gasoline inventories rose by 92,000 barrels last week, the agency said, compared with expectations for a build of 508,000 barrels.

And, last but not least, the EIA revised U.S. crude production estimates down to 10.9 million bpd at the end of last week, from the prior week’s estimated output of 11 million barrels daily.

Though the change was just 100,000 barrels, it was a reflection of the struggle U.S, shale drillers have faced in ramping up output, dispute WTI trading at $65 per barrel. Much of the U.S. production decline has been traced back to the dwindling feeds coming out of the Permian, the once-prolific shale basin that gushed oil like no other in the U.S.

About 250 miles wide and 300 miles long, the Permian spans parts of West Texas and southeastern New Mexico and includes the highly productive Delaware and Midland sub-basins. Data shows the basin is now operating less than half of the oil-drilling rigs it operated a year ago. This is despite the U.S. oil rig count as a whole having doubled to 343 last week from a mid-August low of 172.

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