Oil Market Hits and Misses

(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)

Rigzone’s regular market watchers take a look at some oil market hits and misses this week and reveal what they’ll be looking out for next week. 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, Assistant Professor in Energy, Texas Christian University’s Ralph Lowe Energy Institute: Oil prices have stair-stepped their way to a two-week high this week as the market continues to evaluate the impact, if any, of the start of Russia’s 500,000 barrel per day output curtailment, as well as mixed economic data and continuing concerns over inflation and the U.S. Fed’s response. China’s newfound appetite for imports added some bullish sentiment to the market. WTI started the week off on the downside after the U.S. Commerce Department reported a 4.5 percent decline in orders for durable goods last month but rose later on a lower than forecasted inventory gain. Prices have rebounded slowly and look to settle higher week on week. WTI has stayed north of the $75 per barrel level so far while trading as high as $78.60. Brent crude, while following a similar pattern, has reached a high of $85.20 while keeping well above the $82 mark. February marked the fourth-consecutive month of lower oil prices due to warmer than normal weather in the U.S. and Europe and inflation concerns that have hurt stock prices while lifting the U.S. Dollar.

The Energy Information Administration’s Weekly Petroleum Status Report indicated that commercial inventories last week increased by 1.17 million barrels to a total of 480 million barrels, a 21-month high and rising to nine percent above the five-year average for this time of year. This was the tenth straight weekly increase. The API had forecasted a change of +6.2 million barrels while a group of WSJ analysts had called for a change of +1.0 million barrels. U.S. refineries operated at 85.8 percent, down just slightly from 86.9 percent the prior week. Gasoline stocks fell by 874,000 barrels to 239 million barrels, still -5 percent vs. the 5-year average. Distillate stocks increased by 180,000 barrels to 122 million barrels, lowering the deficit to 10 percent below the 5-year average. East Coast Heating Oil stocks posted an 18,000 barrel gain to 1.2 million barrels. Inventory at the key Cushing, OK, hub rose by 300,000 barrels to 40.7 million, or 53 percent of capacity there. Imports of crude oil were +6.2 million barrels per day vs 6.3 the week prior, while oil exports were 5.6 million barrels per day, a new record and one million barrels per day more than just the prior week. Exports of petroleum products were 5.5 million barrels last week vs 6.0 the week prior. U.S. oil production held 12.3 million barrels per day vs 11.6 last year at this time.

China is poised to go on an oil buying spree as it’s been reported that both Sinopec and PetroChina have placed orders for ten supertankers next month to ship oil from the U.S. Gulf Coast to China. In addition to U.S. crude, China is also buying large quantities from Abu-Dhabi and Russia. China’s rebound from Covid lockdowns appears to have been swift as its Purchasing Managers Index (PMI) for February was 51.6, up from January’s 49.2. Meanwhile, the sanctions imposed against Russia have not stopped their ability to export Urals as India and China remain solid purchases, although the two importers are taking advantage of the price cap to buy discounted barrels. Russian exports in February matched those of December before the start of the sanctions and price cap.

Despite higher earnings, E&P production gains in the U.S. are being offset by the higher costs of development. EOG Resources said it would spend about $1.4 billion more than last year, but that its oil production would rise by only about three percent in 2023. Pioneer Natural Resources said it would augment its budget by nearly $1 billion, but its production would increase by less than seven percent from 2022. Companies attribute ballooning budgets to the inflationary effect on labor and materials as well as maintenance. Drillers are also warning they will have to spend more to extract the same volumes of hydrocarbons, in part because shale fields from North Dakota to Texas, the oil basket of America, are maturing.

Wholesale gasoline prices have moved higher for April for deliveries in New York Harbor and are currently at about $2.70/gallon. Meanwhile, the average price per gallon at the pump for last week was $3.34, -$0.04/gallon from the prior week and -$0.17/gallon below last year at this time. An increase in demand seen last week was attributed to the lower prices. The U.S. stock market finally saw some gains this week as the Atlanta Fed President signaled supporting interest rate increases of just one quarter increments for the near future. Last year, the central bank had raised interest rates at much higher levels. The market had traded lower earlier in the week when the Institute for Supply Management’s February index was reported as lower for the fourth month in a row. All three major indexes look to settle higher week on week. The U.S. Dollar Index is lower as investors shift their risk back into equities and commodities. A lower greenback is supportive of oil prices. 

Barani Krishnan, Senior Commodities Analyst at uk.Investing.com: The weekly rise in U.S. crude stockpiles was smaller than forecast and multi-fold below the previous week’s build. Crude exports also hit a record high, something not seen for months since China turned its attention towards cheap Russian Urals oil, which thanks to the G7’s price cap, has been selling up to $20 a barrel less than competing U.S. Texas Intermediate and U.K. Brent.

Rigzone: What were some market surprises?

Krishnan: The oil market could barely rally on both the micro U.S. build and runaway exports for last week. Even relatively impressive Chinese factory data, just a month after the world’s top oil importer abandoned all Covid controls, failed to provide the spark needed to ignite the market. All this is telling that despite oil bulls’ cry from the treetops that WTI should be trading closer to $90 and Brent $100, not all share such overbearing expectations, especially when U.S. crude stocks have risen by more than 60 million barrels since 2023 began, due to refinery disruptions. 

Also, despite warmer than usual winter weather that has seen more Americans driving at this time of the year, consumption of gasoline and the distillates that go into making diesel and jet fuel has been mixed. Oil longs’ other big bet for March aside from China: a pledge by the Russians to slash 25 percent of their regular production. But I guess one has to wait out the Kremlin on this, as the Ukraine war has exposed more half-truths or complete untruths from the Putin administration than at any other time.

Seng: The rather quick return of China’s economic activity, which is leading to a rapid increase in demand for crude, has not managed to push prices above $80. Gains in the stock market after hearing that interest rates may only increase at quarter-point increments was a change. ‘The devil you know is better than the devil you don’t’. 

Rigzone: What developments/trends will you be on the lookout for next week?

Seng: Traders will be looking for verification of a significant increase in China’s oil imports before assuming a ‘bull’ market for crude has return. Inventories, however small, continue to build. The U.N. has confirmed that Iran has produced weapons-grade, enriched uranium. This could potentially nullify attempts by the U.S. to reach an accord with Iran which would then keep its additional oil supplies from reaching the global market. 

Krishnan: More sideways trading.

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