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Oil price rally explained | Rigzone

(The views and opinions expressed in this article are those of the attributed sources and do not necessarily reflect the position of Rigzon or the author.)

In this week’s edition of Oil and Gas Industry Hits and Misses, Rigzone’s regular market watcher focuses on the latest crude oil market movements, inventory trends, demand expectations and more. Read further for more details.

Rigzone: What were some market expectations that actually happened last week – and which expectations didn’t?

Tom Seng, Director – School of Energy Economics, Policy and Commerce, Collins College of Business, University of Tulsa: Crude oil recovered this week after hitting February levels last week. The rally was fueled by both fundamentals and technicals. The nearly-monthly WTI contract traded below the lower Bollinger Band for three straight days, a buy signal for technical traders, pushing prices toward the 21-day moving average of $95.30. A major draw-down in gasoline inventories, along with increased use of gasoline for power generation in the EU, were key fundamentals that triggered higher prices. The latter is caused by high prices and shortages of natural gas. Brent crude oil managed to rise above the $100 per barrel level again but retreated slightly.

This week’s EIA weekly petroleum status report indicated that commercial crude oil inventories rose 5.5 million barrels to 432 million and were four percent below normal for this time of year. API reported that inventories rose by 2.2 million barrels, while a WSJ poll had predicted a gain of 200,000 barrels. Refinery utilization unexpectedly rose 3.3 percent to 94.3 percent from 91 percent the previous week. Total motor gasoline inventories fell 4.98 million barrels to 220 million barrels, the biggest drop in 10 months and six percent below average. Distillates rose 2.2 million barrels to 111.5 million barrels, or 24 percent above normal.

Crude oil stocks at the key Cushing, OK, hub saw an increase of 723,000 barrels to 25 million barrels, or 33 percent of capacity. Crude oil imports were 6.1 million barrels and 7.3 million barrels in the previous week, while exports were 2.1 million barrels a day, down from 3.5 million barrels a day in the previous week. Exports of finished motor gasoline were 1.1 million barrels per day. US oil production rose to 12.2 million barrels per day, the highest level since April 2020, from 11.2 million barrels per day at this time last year. Volumes withdrawn from the Strategic Petroleum Reserve were 5.3 million barrels, while total inventories fell to 464.5 million barrels, the lowest level in 37 years. The US oil and gas rig count fell by three last week to 764.

EIA is forecasting an increase in US oil and natural gas production in 2023. Crude supply is expected to average 12.7 million barrels per day this year and 11.9 million barrels per day. Natural gas will average 100 Bcfd vs 97 Bcfd in 2022. AAA reported that the national average price at the pump for gasoline was $4.19 per gallon last week and fell below $4.00 per gallon. Meanwhile, September gasoline futures contracts pushed back past the $3.00 mark on higher crude prices and falling inventories.

Inflation slowed last month as both CPI and PPI came in lower. The primary driver for the decline is lower fuel prices. The US stock market reacted positively with all three major indices settling at higher levels for the week. The US dollar is trading lower, which helps support higher oil prices.

Natural gas prices remain strong in the upper $8.00s even though the storage report is close to normal. The EIA weekly natural gas storage report showed an injection of 44 Bcf last week versus an average of 45 Bcf and a forecast of 39 Bcf. Total stored gas is now at 2.5 Tcf, about -10 percent from year-ago levels and -12 percent from the five-year average.

Phil Kangas, Grant Thornton Consulting Leader for Natural Resources and Mining: Gasoline saw historically high prices this spring, so expected oil majors like BP posted record profits at the end of this past quarter, increased dividends and ramped up share buybacks. The downward trend in gasoline prices continues for now, with reporting that the price per gallon has fallen below $4 nationally, a welcome milestone for consumers. Still, a study by Standard Chartered showed that the spring rise in prices at the pump has impacted driving habits, with summer demand reflecting less driving than in every year since 1997, except for 2020. As gas and oil commodity prices have retreated in recent weeks, it’s no surprise to see rig counts in the US and Canada rise in last week’s Baker Hughes survey.

Barani Krishnan, Senior Commodities Analyst at Eye-popping crude builds in the United States in the weeks ending August 5 and July 29 were somewhat offset by last week’s outside draw in gasoline. But OPEC’s announcement this week that it has seen lower demand for its oil this year is not a big surprise, even though the International Energy Agency had forecast higher demand. Really, OPEC?

Rigzone: What are some market surprises?

Krishnan: Crude oil inventories jumped 5.458 million barrels during the week of August 5, against expectations for a build of 73,000 barrels. In the week ending July 29, crude inventories rose by nearly five million barrels, or 4.467 million to be exact. Gasoline inventories fell by 4.978 million barrels last week, against expectations for a decline of 633,000 barrels. In the previous week, gasoline rose by 163,000 barrels.

Conflicting data from the US Energy Information Administration naturally left oil markets somewhat disoriented on Wednesday, extending the glum mood from last week, sending Brent down 14 percent and wiping 10 percent from WTI. Then OPEC came to the rescue. The Organization of the Petroleum Exporting Countries, which usually does everything to prop up crude prices, on Thursday cut its 2022 forecast for world oil demand growth.

OPEC expects 2022 oil demand to rise by 3.1 million barrels per day, down 260,000 barrels per day from its previous forecast. At a glance, that may seem odd indeed: OPEC is reducing oil demand while always demanding higher prices for its producers. However, it must be remembered that a cartel is a master operator when it comes to ‘creating the conditions’ for production cuts. In this case, its forecast of lower demand justifies lower production (read: cuts), which, in turn, raises prices.

Meanwhile, the International Energy Agency said soaring international prices of natural gas would prompt more energy consumers to switch to oil for year-end heating purposes. “Natural gas and electricity prices have soared to new records, fueling gas-oil switching in some countries,” the Paris-based IEA said in its monthly oil report. This raised the outlook for 2022 oil demand by 380,000 barrels per day.

Thursday’s rally in oil was the opposite of what was happening on the ground. The average pump price of gasoline in the United States, arguably the biggest indicator of real oil demand, fell below the $4 per gallon level on Monday for the first time in months after hitting a record high of $5 a gallon in mid-June, prompting American drivers to exercise more discretion in their fuel consumption.

Crude prices also benefited from Wall Street’s top cheerleader – Goldman Sachs – calling for oil prices to hit new highs by the end of the year. “Demand for crude oil is only going to go up from here,” Goldman said, predicting gasoline prices at $5 a gallon and Brent above $130 by the end of the year.

Kangas: Uncertainty continues to be a major theme in the oil market. Brent and WTI crude have been trading below $100 this week, dropping dramatically week-over-week to levels not seen in several months. Traders are balancing demand concerns from a potential recession, OPEC+’s decision to stay the course on production and limited investments from US majors, as well as supply worries from news of complications from the ongoing war in Ukraine. These uncertainties led the US Energy Information Administration to revise its short-term energy outlook and to pull back forecast production for the remainder of this year and next.

Seng: Despite an increase in refinery utilization and lower gasoline exports, there was a substantial draw-down in total motor gasoline inventories.

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