The oil and gas market watchers at Rigzone discuss a notable increase in gas prices, new highs in oil prices, rising geopolitical temperatures, and more in this week’s edition of hits and misses. Here are what the oil and gas intellects discussed.
Question: What were some market surprises?
The Response of Tom Seng, Director – School of Energy Economics, Policy, and Commerce, University of Tulsa’s Collins College of Business: While oil prices have been very strong recently, this week’s surprises have been the February 2022 NYMEX Henry Hub Natural Gas futures contract. A few thousand contracts traded in the final 30 minutes resulted in prices skyrocketing from $4.85/MMBtu to near $7.35/MMBtu, which resulted in a final settlement of $6.265/MMBtu. It was the largest price increase in a single day since 1990 when the contract was formed. Sharks must have been circled in the water when the move occurred because it had all the hallmarks of a classic short squeeze.
The Response of Phil Kangas, Grant Thornton Partner In Charge, Energy Advisory, Natural Resources, and Mining: ExxonMobil announced its goal of achieving net-zero greenhouse gas emissions by 2050 for its owned and operated assets. By 2030, the company wants to reduce emissions to net-zero levels for its Permian Basin operations and to invest in renewable energy to reduce its carbon footprint. To achieve this is heavily dependent on several external factors and assumptions related to public policy, technology development, and consumer behavior in order to achieve these goals. As a result, the net-zero target for greenhouse gas emissions reductions is substantially closer to the goals of the world COP26 Climate Summit, than what we’ve seen so far.
The Response of Frederick J. Lawrence, Conference Speaker, and ex-Independent Petroleum Association of America (IPAA) Chief Economist: The bearish Department of Energy inventory support surprised everyone since consensus was expecting a draw. The Cushing inventory numbers are the lowest in five years, so pundits will be watching them closely. Yemeni Houthi forces continue to attack UAE targets, which is highly surprising. The escalation is a negative development for the Mideast region and puts an even greater spotlight on Yemen’s regime. Subsidies Japan provided to refiners to lower retail prices of petroleum products surprised many. In addition, it serves as a reminder that countries around the world have used a variety of political instruments to mitigate price impact – similar to the U.S. SPR releases of 30 million barrels.
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Question: What were some market expectations that actually occurred during the past week – and which expectations did not?
Seng: Throughout the week, crude prices fluctuated dramatically as volatility ruled the day. US stock markets and the U.S. dollar moved in opposite directions, while WTI and Brent oil hit new seven-year highs. The risk appetite ebbed and flowed daily as investors moved in and out of assets. At the same time, traders stayed on top of developments along the Russian/Ukrainian border and any progress being made in the Iranian nuclear deal. In spite of a bearish inventory report, the market continues to perceive tight supplies vs. rising demand as total petroleum and petroleum products stored are at their lowest since 2014. The March WTI price hit 88 dollars per barrel, while Brent reached 91 dollars per barrel, its highest level since 2014. Earlier this week, talk of a rate hike from the U.S. government sent equities tumbling, strengthening the U.S. dollar, pushing oil prices down. Crude’s recovery was largely attributed to the inventory report and geopolitical risks, but U.S. dollar strength has again limited crude gains.
The OPEC+ group will likely increase output by 400,000 barrels a day starting in February. Members are, however, believed to not be meeting current production levels. In this week’s Weekly Petroleum Status Report, the EIA reported that crude oil inventories rose by 2.4 million barrels to 416 million barrels and are 8 percent below normal for this time of year. WSJ analysts expected a drop of -800,000 barrels, but API stated inventories decreased by 817,000 barrels. In November, refinery utilization had dropped from 88.1 to 87.7 percent, its lowest level since January. A total of 1.3 million barrels of motor gasoline were added to inventories, holding at two percent below the five-year average.
The distillate inventory fell to 17 percent below its five-year average after falling by 2.8 million barrels. During the third weekly decline, crude oil stocks at the Cushing, OK. hub declined by 1.8 million barrels to 31.7 million barrels. There were 1.25 million barrels withdrawn from the U.S. Strategic Petroleum Reserve, bringing the total to 591 million barrels. A total of 13 million barrels of oil were sold from the SPR, with deliveries occurring in February and March. Since November last year, 40 million barrels of oil have been released. The U.S. oil production was down 100,000 barrels a day compared to this time last year when it was 11 million barrels per day. Last week, the number of U.S. drilling rigs rose by three to 604. In the meantime, the number of drilled-but-uncompleted wells continues to decline.
The Texas Railroad Commission has expanded its earthquake response area because seismic activity continues to increase in the Permian Basin while ordering operators to formulate a plan to reduce seismic activity within 18 months. After taking a pounding on Monday, all three major stock indexes in the United States have bounced back, but are still down from last week. Flights from equities helped boost the U.S. dollar, which increased to its highest level in 18 months. Oil prices typically decline when the greenback strengthens as foreign investors retreat from the market.
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The Response of Lawrence: Brent’s price was well over $90 and natural gas rose well over $4/MMBtu due to tight market conditions and rising geopolitical temperatures. There is little surprise that commodities have risen as Russia appears likely to invade Ukraine and cold air moves into the Northern Hemisphere. Markets are likely to be more volatile going forward due to robust demand and supply issues. Various service companies (SLB and HAL) have provided rather bullish market outlooks regarding a new multi-year expansion cycle with additional detail regarding service cost inflation. In light of the extreme price strength in commodities, it will be interesting to observe how exploration and production companies’ earnings and capital expenditure strategies change in the summer and early fall, and whether they decide to a gradual increase in summer.
The Response of Kangas: The question of whether oil will reach $100 has changed to when it will happen. Morgan Stanley joined other large Wall Street banks in forecasting triple-digit oil prices by the end of the year, such as Goldman Sachs and JP Morgan. Oil prices will reach this milestone according to this latest forecast, which is gaining traction. With rising inflation, low crude inventories, and turmoil in major oil-producing nations, along with the reversal of the pandemic, oil prices are expected to rise in the near future.
Since the start of the pandemic, OPEC+ countries have struggled to return to the same production levels as before. They have also fallen short of their collective production targets. As a consequence, spare production capacity has been limited, reducing the buffer required to counteract supply chain disruptions. Growing demand is causing other nations to catch up. In light of this, it is surprising to find that the number of new oil rigs in the U.S. declined last week after months of consecutive gains. Baker Hughes reported that the number of oil rigs in the U.S. decreased by one, but gas rigs increased by four.
