Oil Stays on Rollercoaster Ride
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In this week’s edition of oil and gas industry hits and misses, Rigzone’s regular market watchers focus on oil’s rollercoaster ride, commercial crude stocks, gasoline prices 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: Oil prices continue their rollercoaster ride as conflicting signals led to a volatile Hi/Lo range on the week of about $12 per barrel for both key grades of crude. While it appears less oil is making its way out of Russia, the U.S. stock market wrestled with the impact of inflation vs. the Fed decision to combat it by raising interest rates. WTI plummeted $10 per barrel from Friday’s $109.77 settle in the first two days of trading this week, largely on the EIA’s Short-term Energy Outlook (STEO) which lowered the 2022 global demand for oil and refined products by 100,000 barrels per day. The agency cited higher gasoline prices as a possible deterrent to longer distance traveling this summer. The U.S. standard settled below $100 per barrel for the first time in two weeks Tuesday on concerns about a global economic slowdown. Brent crude experienced similar volatility ranging from a high of about $113.25 to a low of $101.30. Late week prices for WTI and Brent moved higher on the expectation that the EU will institute a ban on Russian oil imports.
This week’s EIA Weekly Petroleum Status Report indicated that commercial crude inventory rose 8.5 million barrels last week to 424 million barrels total, holding at 13 percent below the five-year average. The API reported that inventories rose 1.6 million barrels. Much of the build was attributed to the release of seven million barrels of oil from the SPR. Additionally, refinery utilization rose to 90 percent from 88 percent. Total motor gasoline inventories dropped 3.6 million barrels, falling to five percent below the five-average for this time of year. Distillate inventories decreased 0.9 million barrels, falling to 23 percent below the five-year average. Crude oil stocks at the key Cushing, OK. hub dropped 590,000 barrels to 28 million barrels or 37 percent of available capacity. The U.S. Strategic Petroleum Reserve is now down to a remaining total of 543 million barrels. U.S. oil production fell 100,000 barrels per day to 11.8 million barrels per day vs. 11 million barrels per day at this time last year. Imports of crude oil increased to 6.27 million barrels per day from 6.33 million barrels per day, while U.S. exports averaged 2.9 million barrels per day. The U.S. oil and gas rig count rose by seven last week to a total of 705, up 57 percent from a year-ago. The IEA is reporting that Russia’s April crude output fell 900,000 barrels per day and it’s expected to fall another 600,000 barrels per day this month. An EU boycott of the Urals could result in a curtailment of almost three million barrels per day from Russia.
Volatility in the U.S. stock market was also rampant this week as investors and traders waffled back-and-forth from viewing the Fed rate increase as a positive move to curb inflation to viewing the decision as stifling economic growth. April inflation only eased slightly to 8.3 percent from March’s 8.5 percent but represented the first decline in eight months. All three major U.S. indexes are trading at 52-week lows as some traders fear the Fed will only get more aggressive with future rate hikes. On the flip side, the WSJ U.S. Dollar index is trading at a 52-week high which would normally cause oil prices to trade lower. However, the flight from equities has investors moving into commodities such as crude.
In what now sounds like a broken record, the average U.S. gasoline price at the pump hit a new all-time high of $4.37 per gallon last week and has now hovered over the $4 mark for more than two months. Last year at this time, pump prices averaged $2.97 per gallon. June RBOB futures settled at an all-time high of $3.797 per gallon on Thursday signaling even higher possible pump prices for the summer driving season. The huge draw-down in U.S. distillate inventories is beginning to cause concerns for diesel users. Two of the nation’s largest truck stop operators, Love’s and Pilot, are reporting low diesel inventories along the East Coast where stocks have fallen to 1990 levels. NYMEX futures for ULSD continue to trade at a premium to RBOB which could also keep gasoline prices high. Ironically, while the Biden Administration has authorized the sale of E-85 gasoline this summer, ethanol inventories are also a record low levels.
Hillary Stevenson, Director, Industry Relations at oil and gas data firm Validere: U.S. commercial crude stocks rose 8.5 million barrels while SPR inventories dropped seven million barrels. This sea-saw was expected as SPR releases move into commercial inventories. Surprisingly, only two million of the commercial stock increase was in PADD 3 (where the SPR is located), while PADD 5 saw an increase of 3.4 million barrels. PADD 5 increases are in part due to higher imports, which were up 233,000 barrels per day last week into the region.
Jon Donnel, Managing Director, B. Riley Advisory Services: Product prices continue to climb, hitting fresh highs all week long. Despite the record high retail prices, inventory levels have continued to drop, particularly for diesel fuel. Overall U.S. diesel stocks are at the lowest level since 2006 and PADD 1 (East Coast) supply is at the lowest level on record back to 1990 according to data from the EIA. Refinery utilization in the U.S. remains high at over 90 percent, but with total capacity down about one million barrels per day versus the beginning of the pandemic, there is less opportunity for domestic refiners to add finished products to the market and international supply chains are unlikely to be of much help in the near term. It is increasingly clear that crude oil and finished product markets are not perfectly correlated and proposed quick fixes to high pump prices often miss this dynamic.
Rigzone: What were some market surprises?
Seng: NYMEX natural gas futures remain an ongoing surprise as prices stay north of $7.60 per MMBtu because global demand for LNG continues to increase just as the summer air conditioning season approaches. Gas fired generation will be strong globally and U.S. Independent System Operators (ISO) are already voicing concerns about generating capacities. California, in particular, admits being short power sources, especially given another low snowpack coming out of winter. With record low levels in the region’s largest reservoirs, mountain run-off will be below normal again. The greater New York City area will be facing its first summer without the entire Indian Point Nuclear Power Station which was shut down without a corresponding replacement source of generation.
Donnel: Crude oil had another volatile week, but it was surprising to see how little impact the large inventory build announced mid-week had on prices. WTI briefly traded below $100 per barrel on Tuesday but rebounded over five percent on Wednesday despite the announcement by the EIA that U.S. commercial stock levels had increased by over eight million barrels during the prior week, more than offsetting ~seven million draw of the strategic petroleum reserve. The SPR is down about 22 million barrels since the beginning of April, but retail gasoline prices have since reached record levels – perhaps not the ideal policy for combatting inflation.
Stevenson: U.S. Gasoline demand dipped last week amid high prices. U.S. Weekly Gasoline product supplied (a proxy for demand) fell 154,000 barrels per day to 8.702 million barrels per day for week ending May 6, levels not seen since early April. Weekly U.S. Regular Conventional Retail Gasoline Prices were at $4.16 per gallon May 9, only $0.02 per gallon cheaper than the record high set March 18. Average gas prices briefly touched $4 per gallon in 2008, but had not surpassed that level until March 2022. Gasoline demand destruction may have begun to bite. Meanwhile, Weekly U.S. No 2 Diesel Retail Prices are rising with no end in sight. Unlike gasoline demand, diesel demand tends to be relatively inelastic. High demand and extremely low supplies in storage are supporting higher prices.
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