In this week’s edition of oil and gas industry hits and misses, Rigzone’s regular market watchers look at a notable gas price increase, new oil price highs, rising geopolitical temperatures and more. Read on to find out what they had to say.
Rigzone: What were some market surprises?
Tom Seng, Director – School of Energy Economics, Policy and Commerce, University of Tulsa’s Collins College of Business: The continuing strength of oil prices has been impressive but the February 2022 NYMEX Henry Hub Natural Gas futures contract ‘takes the cake’ for surprises this week. Trading just a few thousand contracts in the final 30 minutes, prices skyrocketed from $4.85/MMBtu to near $7.35/MMBtu, resulting in a $6.265/MMBtu final settlement. It was the biggest one-day price increase since 1990, the inception year for the contract. The move had all the signs of a classic short-squeeze and the sharks were probably circling in the water.
Phil Kangas, Grant Thornton Partner In Charge, Energy Advisory, Natural Resources and Mining: ExxonMobil was the latest energy major to announce its plan to achieve net zero greenhouse gas emissions for operated assets by 2050. The commitment builds on its 2030 emission-reduction plans, which include net-zero emissions for Permian Basin operations and investments in lower-emission energy innovations such as carbon capture. Achieving these goals relies on several external factors and assumptions regarding technology development, public policy action and consumer behaviors. Nevertheless, the net-zero aspiration for greenhouse gas emissions reduction signifies a commitment more closely aligned with the 2021 COP26 United Nations Climate Summit than what we’ve seen to date.
Frederick J. Lawrence, Conference Speaker and ex-Independent Petroleum Association of America (IPAA) Chief Economist: The bearish Department of Energy inventory support came as a surprise as consensus was anticipating a draw. Inventory pundits will be watching Cushing inventories closely as they are the lowest in five years. I was surprised by continued attacks on UAE by the Iran-backed Houthi in Yemen. This escalation does not bode well for the Mid-East region and will certainly bring about greater international scrutiny on the Yemen regime. Japan’s subsidies to refiners in order to curb retail prices of various petroleum products was a surprise as well as a reminder of various political tools being used in consumer countries around the world to mitigate price impact – similar to U.S. SPR releases which total 30 million barrels.
Rigzone: What were some market expectations that actually occurred during the past week – and which expectations did not?
Seng: Crude prices fluctuated dramatically this week as volatility was the name of the game. The U.S. stock market and the U.S. dollar moved in opposite directions while new seven-year highs were hit for WTI and Brent. Investors seemed to move in-and-out of assets daily as the appetite for risk ebbed and flowed. All the while, traders kept a watchful eye on the developments along the Russian/Ukraine border as well as any progress being made in the Iranian nuclear deal. Even a bearish inventory report couldn’t change the market perception of rising demand vs. tight supplies as total petroleum and petroleum products stored are at the lowest levels since 2014. March WTI hit $88 per barrel while Brent notched just above the $91 per barrel mark, its highest since 2014. Early week talk of interest rate hikes by the U.S. Central Bank sent equities falling, strengthening the U.S. dollar which pushed oil lower. Crude’s rebound came mostly on the inventory report and geopolitical risks but the U.S. dollar has rebounded again holding crude back from any higher gains.
The OPEC+ group is expected to agree to an additional 400,000 barrels per day of output effective February 1 but there is widespread belief that members aren’t meeting current production levels. This week’s EIA Weekly Petroleum Status Report indicated that commercial crude inventory rose by 2.4 million barrels to 416 million barrels total and still eight percent below the average for this time of year. The API reported that inventories decreased 817,000 barrels while WSJ analysts called for a drop of -800,000 barrels. Refinery utilization dropped from 88.1 percent to 87.7 percent, the lowest operating level since November. Total motor gasoline inventories rose by 1.3 million barrels and are holding at two percent below the five-average for this time of year. Distillate inventories decreased 2.8 million barrels, falling to 17 percent below the five-year average. Crude oil stocks at the key Cushing, OK. hub fell 1.8 million barrels to 31.7 million barrels for the third weekly decline. The U.S. Strategic Petroleum Reserve had a draw of 1.25 million barrels leading to a total of 591 million barrels. The U.S. Department of Energy made additional sales of oil from the SPR totaling 13 million barrels, with deliveries to take place in February and March. The Department of Energy has released 40 million barrels since last November. U.S. oil production was down 100,000 barrels per day to 11.6 million barrels per day vs. 11 million barrels per day at this time last year. The U.S. rig count rose three last week to 604. Meanwhile, the inventory of drilled-but-not-completed (DUC) wells continues to decline.
Seismic activity continues to increase in the Permian Basin which has caused the Texas Railroad Commission to expand its seismic response area while ordering operators to formulate an 18-month plan on wastewater disposal that will reduce the tremors. All three major U.S. stock indices, which took a pounding on Monday, have rebounded but are still down week-on-week. The flight from equities benefited the U.S. dollar which rose to the highest level in 18 months. A stronger greenback tends to lower oil prices as investors with foreign currency exit the market.
Lawrence: Given the tightness in market balance and rising geopolitical temperatures, it was not a surprise to see Brent hit $90 and natural gas jump well over $4/MMBtu. As pundits put the odds of Russia invading Ukraine at over 70 percent and as cold weather arrives in the Northern Hemisphere, it is little surprise that commodities jumped. Robust demand along with supply issues will mean more volatility for markets going forward. I was not surprised by rather bullish market outlooks from various service companies (SLB and HAL) regarding the new multi-year expansion cycle with added detail regarding service cost inflation. It will be interesting to watch exploration and production companies’ earnings and capital expenditure strategies evolve given the extreme price strength seen in commodities and whether some push for gradual production increases in summer/2H.
Kangas: The debate on oil prices hitting the $100 milestone have shifted from whether it will happen to when it will happen. Last week Morgan Stanley joined the chorus of large Wall Street banks such as Goldman Sachs and JP Morgan forecasting triple digit oil prices by the end of this year. This latest forecast adds to a growing consensus view that oil prices will hit this milestone. Rising inflation, low crude inventories, turmoil in major oil producing nations and expected increased demand from the receding pandemic all contribute to the bullish outlook for rising oil prices.
OPEC+ nations have struggled to return to oil production levels which had been cut back at the start of the pandemic, underperforming against their collective production targets in recent months. The result has been a limit on spare production capacity, reducing the needed buffer against supply chain disruptions. High prices and growing demand are driving other nations to close the gap. It was surprising then to see that new U.S. oil rig counts were down last week after months of consecutive gains. Baker Hughes reported U.S. based oil rig counts were down by one, while gas rigs added four.
To contact the author, email andreas.exarheas@rigzone.com
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