What Happened in the Oil Market This Week?
(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 focus on recent oil price moves, the bearish impact of Covid-19 in China, the Russian oil price cap and more. Read on for more detail.
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: Concerns over the global economy overtook potentially bullish geopolitical events this week, sending crude prices lower on the week. WTI traded as low as $81.40 per barrel while Brent broke the $90.00 mark, trading down to $89.50 at one point. Oil futures had rallied late last week on a weaker U.S. Dollar and the prospect that China might relax some Covid-19 restrictions, but the greenback gained some strength this week and inflation worries dimmed the outlook for future energy demand. The report of an oil tanker being hit by a drone-launched bomb off the coast of Oman, the on-going Russian tensions and a bullish inventory report could not keep crude afloat this week.
This week’s EIA Weekly Petroleum Status Report indicated that inventories of commercial crude fell by -5.4 million barrels to 435.5 million barrels, slipping to four percent below normal for this time of year. The API reported that inventories declined 5.8 million barrels while the WSJ survey predicted a decrease of just 500,000 barrels. Refinery utilization increased by 0.8 percent to 92.9 percent vs 92.1 percent the prior week. Total motor gasoline inventories rose by 2.2 million barrels to 208 million barrels, now at five percent below average. Distillates increased 1.1 million barrels to 107 million barrels, rising to 15 percent below normal. Crude oil stocks at the key Cushing, OK, hub fell 1.6 million barrels to 25.6 million barrels, or 33 percent of capacity. Imports of crude oil were 5.6 million barrels per day, while crude exports were 3.9 million barrels per day, up from 3.5 million barrels per day. Exports of refined products were 6.0 million barrels per day, down from 6.1 million barrels per day. Volumes withdrawn from the Strategic Petroleum Reserve were 4.1 million barrels, which dropped the total inventory to 392 million barrels.
U.S. oil production held at 12.1 million barrels per day vs 11.4 million barrels per day last year at this time. Diesel prices have come down from their four-month highs just three weeks ago to a six-week low of around $3.50/gallon as inventories have increased and energy prices are lower across the board. The Biden administration is asking the U.S. Congress for $500 million to modernize the Strategic Petroleum Reserve. China imported 10 million barrels per day of crude in October, the highest level since May. Two new refineries are expected to come online there soon which could result in China displacing the U.S. as the world’s top refiner.
The number of ‘drilled-but-uncompleted’ (DUCs) wells increased by eight in October to 4,408, ending a 27-month streak of declines. The lower completion rate may be the result of higher costs and supply chain issues. Citing weaker economic conditions, the prospect of global recession and China’s strict anti-Covid measures, OPEC lowered its forecast for supply needs by 525,000 barrels per day for the third quarter of 2022. This is additive to the 2.0 million barrel per day cut announced by the OPEC+ group last month. OPEC also lowered its 2023 demand forecast by 2.2 million barrels per day.
Despite some positive inflation news for October, all three major stock indexes are lower on the week as there are no signs that the Fed will slow down its interest rate hike strategy. The U.S. Dollar has had its ups and downs this week as well and is struggling to settle higher on the week. However, economic concerns are outweighing the bullish impact that a lower dollar normally has on oil prices.
Barani Krishnan, Senior Commodities Analyst at uk.Investing.com: China and Covid have been virtually inseparable since we first heard of the coronavirus three years ago, evidenced by continuous headlines of infection breakouts in the world’s largest population even as other countries barely contribute to the global pandemic register now. What’s surprising though is the extremely bearish impact that Covid-19 breakouts in China can still have on oil prices. This week’s Chinese headlines on the virus alone caused an eight percent drop during the week to Thursday in WTI crude prices. Brent crude, meanwhile, tumbled almost seven percent on the week. All this despite OPEC+’s bid to wrest back control of crude prices via this month’s much-ballyhooed production cuts.
Rigzone: What were some market surprises?
Seng: Reuters reported that 11 vessels carrying about 3.6 million barrels per day of distillates, including low-sulfur diesel and home heating oil, is on its way to the New York Harbor from Europe. The U.S. Northeast is the world’s largest consumer of heating oil and inventories in the region are currently 14 million barrels, or 15 percent below normal. One has to recognize the irony of an energy short Europe sending distillates to the U.S., which only serves to bring into question the continued existence of the Jones Act restrictions on intra-country shipping. Traders seem to be caught in a ‘Catch-22’ situation as concerns over possible recession are leading to lower energy prices which are the prime contributor to the high inflation. Sustained lower energy prices will, in turn, bring down inflation which should alter the Fed’s plans for future interest rate hikes.
Krishnan: OPEC+, an organization led by Saudi Arabia with assistance from Russia, announced at the end of September that the 23 nations in its coalition would impose a two million barrels per day production cut from November. It would be the largest output reduction in two years by OPEC+ since oil prices began recovering from the worst effects of the coronavirus pandemic by the second half of 2020. OPEC+’s motive with this production cut was to offset constant worries about oil demand that had crept up in recent months as global economies sent off recession signals from runaway inflation in the aftermath of the pandemic.
Crude prices hit 14-year highs in March, with Brent just shy of $140 and WTI tipping just over $130. By September though, Brent had fallen to around $82 and WTI to around $76. The OPEC+ ordered production cuts helped Brent come within cents of $100 a barrel two weeks ago and for WTI to reach above $93, but Covid-19 headlines out of China killed the rebound, driving both benchmarks lower. In Thursday’s session, Brent settled below $90 the first time since Oct. 18. WTI closed beneath $82 a barrel, its lowest since Sept. 29.
Talk is also growing that the G7-EU engineered Russian oil price cap, which market bulls expect to lead to an even bigger crunch in global supply, will only result in a fleeting price rally. That’s because Russian barrels will likely get rerouted and not taken off the market. That’s exactly the wish of the U.S. and its allies - that Putin earns considerably less for the same volume of Russian oil floating around the world.
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