Supply Constraints Remain an Issue

(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 look at supply constraints, the UAE oil infrastructure incident, calls for $100+ oil 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?

Jon Donnel, Managing Director, B. Riley Advisory Services: Supply constraints remain an issue and will continue to support higher crude prices heading into the new year. OPEC published its Monthly Oil Market Report this week, confirming that the cartel is having difficulty meeting production targets. The group has steadfastly maintained its headline goals of adding 400,000 barrels per day of additional supply back into the global market, but actual results during 4Q fell well short of expectations with OPEC adding about 780,000 barrels per day on average versus 3Q and targeted growth of 1.2 million barrels per day. The issue appears to go beyond just OPEC as Russia production was reported to be flat month-over-month in December. Long-term underinvestment in exploration and drilling will continue to hamper supply balances.

Tom Seng, Director – School of Energy Economics, Policy and Commerce, University of Tulsa’s Collins College of Business: After hitting seven-year highs on tight supplies and Mideast unrest, crude oil fell back late week on large product inventory gains. WTI neared $88 per barrel while Brent surged past the $89.50 mark as the week started with the news of a Yemeni rebel drone attack on UAE oil infrastructure, only adding to existing concerns over declining supplies. OPEC members not producing at their agreed-upon output levels, coupled with concerns over a possible Russian invasion into Ukraine, just amplifying existing supply-side woes. However, an inventory report that showed a large build in gasoline reversed crude’s momentum with both grades appearing to settle lower week-on-week as the March contract moves to the ‘prompt’ position.

This week’s holiday-delayed EIA Weekly Petroleum Status Report indicated that commercial crude inventory rose by 515,000 barrels to 414 million barrels total and still eight percent below the average for this time of year. The API reported that inventories increased by 1.4 million barrels while WSJ analysts called for a drop of 800,000 barrels. Refinery utilization dropped from 88.4 percent to 88.1 percent. Total motor gasoline inventories rose by 5.9 million barrels and are now two percent below the five-average for this time of year. Distillate inventories decreased 1.4 million barrels and back to 16 percent below the five-year average. Crude oil stocks at the key Cushing, OK, hub fell 1.3 million barrels to 33.5 million barrels for the second weekly decline. The U.S. Strategic Petroleum Reserve had a draw of 1.35 million barrels leading to a total of 592 million barrels. The U.S. Department of Energy made additional sales of oil from the SPR totaling 18 million barrels with deliveries to take place in February and March. U.S. oil production returned to 11.7 million barrels per day - 11.0 million barrels per day at this time last year. The U.S. oil rig count rose 11 last week to 492, a 21-month high.

OPEC reported that 4Q21 oil demand was higher-than-expected with little impact from the Omicron variant. The cartel is holding its 2022 demand growth forecast steady at 4.2 million barrels per day but has left the door open to a possible virus effect. Meanwhile, the IEA expects 2022 demand to exceed pre-pandemic levels. In the U.S., the EIA sees shale oil increasing by 104,000 barrels per day in February for a total of 8.54 million barrels per day.

The Biden Administration is considering lowering the current ethanol blending mandate which would be a boon for unleaded gasoline and oxygenators such as natural gasoline and butane. All three major U.S. stock indices are down for the week which could also be pressuring oil prices. The U.S. Dollar is higher on the week aiding some bearish sentiment to the greenback-denominated commodity.

Rigzone: What were some market surprises?

Donnel: Even with the news on the supply side, it was unexpected to see oil prices continue to rally to the levels seen this week. WTI traded above $87 per barrel, hitting highs last seen in 2014 and Brent flirted with $90 per barrel. Analyst forecasts calling for $100+ oil in 2022 sounded a bit optimistic a couple weeks ago, but now are well within reach. Tensions along the Russia/Ukraine border are likely contributing to the recent bump in prices and the muddled messaging from the Biden administration regarding the likelihood of a Russian invasion and the resulting response from the U.S. and NATO only adds to the volatility.

Seng: The Yemeni rebel attack on UAE tankers shook the market during a U.S. holiday when exchanges were closed. WTI futures prices have been north of $70 per barrel for four weeks now yet production has yet to exceed 11.8 million barrels per day. Pre-Covid crude production was a record high 13 million barrels per day.

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