Texas Outages Headline Unusual Week in Markets
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The unexpected trumped the expected in the oil and gas markets this week. Read on for two of Rigzone’s regular market-watchers’ perspectives on recent developments.
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: Not much of what happened this week was expected. Certainly, the magnitude of the deep freeze encompassing the central part of the U.S. down to Mexico causing major energy outages was not foreseen. Nor was the cascading failure of the Texas energy infrastructure which interrupted oil, gas, and power throughout the state.
WTI crested the $62 mark this week while Brent broke through $65 on strong fundamentals, but both grades appear to be heading for lower settles at week’s end. A much higher-than-expected crude inventory draw for last week helped extend oil’s two-week rally, which began on optimism over vaccine distribution and strict output compliance by OPEC+ including the 1 million-barrel per day (bpd) cut by Saudi Arabia. However, these higher prices are leading to discussions about potential output increases by the cartel, putting some downward pressure on prices. And, while over 1 million bpd of Texas oil supply was curtailed due to the extreme weather, refineries on the Texas Gulf Coast also suffered weather-related outages which cut demand. A rapid warm-up is forecasted across Texas this weekend, with temperatures in Midland climbing into the 50s – which should help thaw Permian Basin production. Sixties are expected there by mid-week next week.
This week’s holiday-delayed U.S. Energy Information Administration (EIA) Weekly Petroleum Status Report showed a large, 7.3 million-barrel decrease vs. a Wall Street Journal analysts’ forecast calling for a drop of 2 million barrels and an American Petroleum Institute (API) report showing a 5.8 million-barrel decline. At 462 million barrels, inventories have fallen back to right at the five-year average for this time of year.
Refinery utilization was 83 percent at 14.82 million bpd, up about 20,000 bpd. Total motor gasoline inventories increased by 700,000 barrels and are now at one percent above the five-year average for this time of year. Distillate inventories fell 3.4 million barrels to six percent above the five-year average. Crude oil stocks at the key Cushing, Okla., hub were down by 3 million barrels to 45 million barrels – or 59 percent of capacity there. U.S. oil production last week fell to 10.8 million bpd, down from the record-high 13 million bpd a year ago – but we know it’s already lower than that now. Imports of oil were 5.9 million barrels last week vs. 6.5 million a year ago. The EIA is also reporting that more total petroleum products were exported from the U.S. than imported in 2020 but the agency sees a return to net imports in 2021.
The Dow rallied to new heights this week, breaching the 30,600 mark only to retreat by week’s end. The S&P and NASDAQ also posted high-water marks as optimism over widespread distribution of the vaccine continues to support market momentum. This week’s unemployment report did show an uptick after what had been a downtrend. The U.S Dollar index hit a two-month high earlier in the week but declined late. However, this has not supported oil prices which is the norm. While mostly due to higher oil prices, U.S. import prices rose in January – adding some inflationary concerns. While the Federal Reserve is targeting two percent, that reduces disposable income for consumers who represent the vast majority of spending in the country.
A huge withdrawal of natural gas, increasing demand, and lower production all served to boost prices to $3.30 at one point – a level not seen since the first week of Nov. 2020. As with crude, however, natgas looks to end the week lower. The EIA’s Weekly Natural Gas Storage Report indicated a withdrawal of 237 billion cubic feet (Bcf) vs. expectations for a drop of 251 Bcf last week, leaving stored natural gas at 2.28 trillion cubic feet – now four percent lower than last year and only 2.6 percent over the five-year average. Another huge withdrawal should be reported next week given the current weather conditions and demand scenarios. Supply last week was already down to 79.5 vs. 90.3 Bcf per day (Bcfd) the prior week. Early estimates for storm-related production outages have this week’s production down to 70 Bcfd. Total demand last week was 129 Bcfd, up 6 Bcfd from the prior week with residential and power consumption up considerably. Exports to Mexico were down to 4.9 Bcfd while exports of LNG fell to 6.2 Bcfd vs. 11.0 Bcfd the prior week. This may have been voluntary given the onshore natural gas shortages.
Barani Krishnan, Senior Commodities Analyst, Investing.com: It isn’t surprising at all to see the sort of U.S. crude draws that we’re having now, given the demand for heating oil from the deep-freeze that has hit the nation and paralyzed some of its oil producers – in of all places Texas, the heartland of American energy.
Rigzone: What were some market surprises?
Krishnan: Texas is all over the place right now, and we’re likely to see these sorts of gargantuan draws for at least a couple more weeks. Another surprise is U.S. exports, which shook the roof again last week with a jump of 2.5 million bpd – reaching 3.86 million bpd. Just three days of that alone would account for the net crude draw we had last week.
Interestingly, U.S. crude imports rose by 41,000 bpd last week, but the key Cushing storage hub saw a 3-million-barrel net drop, offsetting that. Something everyone was interested in seeing -- heating oil demand -- didn’t disappoint, with a drawdown of 3.4 million barrels last week, more than double that was forecasted. U.S. crude production, as a whole, was expected to have dropped by 200,000 bpd last week, though that could be bigger once the math of outages is done in the coming week.
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