Vaccine Concerns Dampen Oil Demand Outlook
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For the past year, COVID-19 has been a drag on oil demand. Although the oil demand outlook has improved dramatically since last March, recent concerns about the safety of a coronavirus vaccines as well as the vaccination rate – as well as fears about more lockdowns – have dampened expectations. Read on for insights on this and other recent developments important to the oil and gas markets.
Rigzone: What were some market expectations that actually occurred during the past week – and which expectations did not?
Samuel Indyk, Senior Analyst, uk.Investing.com: The increase in COVID-19 cases in Europe and slow roll-out of their vaccination program is now looking like it could weigh on oil demand for longer than previously feared. The suspension of the AstraZeneca (NASDAQ: AZN) vaccine by numerous countries in Europe could further slow progress towards herd immunity with public confidence in the vaccine at an all-time low. The fears have played out in the market with the European gasoil crack falling to its lowest level since November 2020.
Jon Donnel, Managing Director, B. Riley Advisory Services: We expected to see crude prices level off after the recent run, especially considering that U.S. storage levels have been stabilizing over the past few weeks. This trend continued with another modest build in total crude stocks despite imports declining compared to a week ago.
Tom Seng, Director – School of Energy Economics, Policy and Commerce, University of Tulsa’s Collins College of Business: Crude’s rally, which started at the beginning of last month, came to a crashing halt yesterday as demand concerns re-emerged, inventories increased, and the International Energy Agency (IEA) contradicted the prevailing outlook on the global crude surplus.
After being up almost 30% since the first of the year, Brent and WTI prices fell over $4 yesterday and were down almost $6 at one point – the biggest one-day decline since last September. Both grades of oil will settle down substantially on the week. The spread of COVID-19 variants in Europe has led to concerns about possible shut-down again, which would dampen demand. Meanwhile, the IEA in Paris reported that global inventories of crude are still much higher than pre-coronavirus levels, contradicting the market sentiment that supplies are tight and we are in a “super-cycle” for oil. Technical traders also jumped on the lower price move, further adding downward price momentum as WTI had been trading above its 13-day moving average (MA) and well-above its 21-day MA.
The U.S. Energy Information Administration (EIA) Weekly Petroleum Status Report showed a 2.4 million-barrel inventory increase vs. an American Petroleum Institute (API) report showing a moderate 1 million-barrel gain, with analysts calling for 3 million barrels. At 501 million barrels, inventories have risen to 6% above the five-year average for this time of year. However, for the first time in several weeks, we saw small gains in both total motor gasoline (+500,000 barrels) and distillates inventories (+300,000 barrels). Stored volumes of both refined products remain below their five-year average levels, however. Refinery utilization increased to 76%, up from 69% the previous week. But the general sentiment is that refiners are in no hurry to increase output as “crack spread” margins have been very strong – at or above $20 per barrel on a 3:2:1 ratio. Additionally, refineries are entering “turn-around” where gasoline blends are switched from winter to summer and routine maintenance occurs ahead of the summer demand period. Crude oil stocks at the key Cushing, Okla., hub were down 624,000 barrels to 48 million barrels, or 63% of capacity there. U.S. oil production held at 10.9 million barrels per day (bpd) – but far below last year’s 13.1 million bpd.
This week, the IEA also floated the idea of “peak” gasoline as it sees the global proliferation of electric vehicles stifling a return to the high demand levels of 2019. While the agency sees global crude demand rising to 104 million bpd by 2024, it doesn’t see gasoline demand following suit.
After cresting new highs, the Dow, S&P and NASDAQ will settle lower on the week. The U.S. dollar rose this week, further adding downward pressure on oil prices.
Natural gas prices are lower this week as a less-than-expected storage withdrawal is coupled with moderating temperatures for most of the U.S. The EIA’s Weekly Natural Gas Storage Report showed a withdrawal of just 11 billion cubic feet (Bcf) vs. expectations for a drop of 22 Bcf while the five-year average was a draw of 59 Bcf. Stored natural gas now stands at 1.78 trillion cubic feet, which is 12% lower than last year and 5% below the five-year average. Supplies of natural gas were slightly lower at 90.8 vs. 90.9 Bcf per day (Bcfd) the prior week. Total demand last week was 100 Bcfd, down from 103 Bcfd the prior week with residential usage falling the most. Exports to Mexico held at 5.6 Bcfd while exports of LNG rose to 11.1 Bcfd from 10.6 Bcfd the prior week.
Rigzone: What were some market surprises?
Donnel: What was not anticipated was the velocity of the decline in crude prices on Thursday. The magnitude of the selloff was all the more surprising given that the drivers of the decline such as higher U.S. inventory levels and increasing COVID counts and issues with vaccination delivery in Europe had been reported earlier in the week and theoretically should have been priced in.
The rout in energy stocks made for unfortunate timing for first shale IPO since 2017. Vine Energy ended up being priced at $14 per share versus the original range of $16-19 per share, then sold down another 3.5% during its first trading day driven by the weaker commodity prices. Any E&P activity in the equity markets is a noteworthy event, but there is clearly not much appetite to put new money to work in the space just yet.
Indyk: The impact of the rising U.S. dollar following another increase in U.S. Treasury yields pressured the energy complex, particularly on Thursday after the Federal Reserve rate decision. The good news is that with oil prices falling, some of the inflationary pressures that markets are expecting in the second half of the year could begin to subside which in turn might slow the rise in U.S. yields.
Mark Le Dain, vice president of strategy with the oil and gas data firm Validere: The ban on the issuance of drilling permits on federal lands, one of the Biden administration’s first acts, is set to quietly expire and will not be renewed. This means the processing of oil and gas drilling permits will resume regular course. While we may assume second-order thinking, for example that the relaxed stance is due to a fear of already rising gas prices, it seems to simply be that a public forum will review the ban before further steps.
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