Is the Oil Demand Outlook Too Rosy or Not Rosy Enough?

(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.)

The past week has been particularly volatile in the oil market, with the Brent and West Texas Intermediate (WTI) futures prices losing more than 6% and 7%, respectively, on Monday. The sharp drop early in the week stemmed from factors such as an OPEC+ finally making a deal to increase output, mounting COVID-19 fears, and a rising U.S. dollar, Bloomberg reported. Prices have since rebounded, however, with WTI and Brent erasing Monday’s losses by Thursday evening – as Rigzone’s pricing graphs show.

The recent oil market volatility discounts global demand, suggests one of Rigzone’s prognosticators. Meanwhile, another regular market-watcher offers a less optimistic take. Read on for their perspectives.

Rigzone: What were some market expectations that actually occurred during the past week – and which expectations did not?

Jon Donnel, Managing Director, B. Riley Advisory Services: It was an exceptionally volatile week for oil prices as OPEC+ finally compromising to add 400,000 barrels per day back into the market each month for the remainder of the year started things on the back foot Monday. That said, global demand remains strong and is still expected to well outpace supply into next year, helping prices make the round-trip back above $71 per barrel. The magnitude of the day-to-day changes make the market feel a bit unstable, but the underlying fundamentals provide a constructive backdrop for the commodity.

Tom Seng, Director – School of Energy Economics, Policy and Commerce, University of Tulsa’s Collins College of Business: OPEC+ and the COVID-19 delta variant provided overwhelming bearish sentiment at one point this week, causing both WTI and Brent to fall below the $70 level for the first time in over a month. Both grades appear to be headed for either a minor gain or loss on the week, however.

The OPEC+ group finally came to a decision on output but it was not one U.S. producers wanted to hear as their plan now involves increasing output by 400,000 barrels per day (bpd) for the next several months, resulting in a total increase of 3.2 million bpd over current levels. However, Saudi Arabia believes global demand will be able to absorb these gradual increases. Meanwhile, the spread of the Delta variant of the COVID-19 virus continues with more and more countries reporting rising cases. The International Olympic Committee reportedly came close to canceling the Tokyo Olympics at the last minute while, in the U.S., the Delta variant is now the dominant strain. New cases of an additional strain of the virus, “Lambda,” are being reported as well.

The increase in supply, coupled with fears of another virus-related decline in demand, caused crude prices to plummet by over $5 per barrel Monday. But, this “too far, too fast” drop in prices led to increased buying the rest of the week, returning prices to near last week’s ending levels. The rally was also supported by technical indicators which showed prices had breached two standard deviations below the mean, a strong signal that prices would return to their moving averages. August 2021 WTI futures expired Tuesday, with September now being the prompt month.

The Energy Information Administration (EIA) Weekly Petroleum Status Report indicated that commercial oil inventories increased by 2.1 million barrels while analysts were calling for a 3.7-million-barrel drop. The American Petroleum Institute (API) reported that inventories increased by 800,000 barrels. Total crude stored now sits at 440 million barrels, 7% below the five-year average for this time of year. Refinery utilization was 91.4% vs. 91.8% the prior week. Total motor gasoline inventories saw a slight decline of 100,000 barrels and are now at the five-year average for this time of year. The API had called for an increase in gasoline stocks of 3.3 million barrels. Distillates fell by 1.3 million barrels and are 4% below the five-year average. Crude oil stocks at the key Cushing, Okla., bub fell by 1.3 million barrels to 36.7 million barrels, or about 48% of capacity there – the lowest level since January 2020. U.S. oil production held at 11.4 million bpd, 300,000 bpd higher than year-ago levels. And, for the first time in several weeks of reporting, no crude was drawn from the Strategic Petroleum Reserve.

Energy data company Enverus is reporting an increase of 24 oil and gas rigs for the week ending July 23, with 11 of those additions coming in the Permian Basin. Meanwhile the EIA is reporting a decline of 269 drilled-but-uncompleted wells (DUCs) from May to June.

Fitch Ratings is projecting a 3% increase in CAPEX for U.S. oil and gas companies this year while increasing to 9% in 2022, still short of pre-pandemic levels. However, they are seeing an increase in hedging activity at these price levels.

The Dow, S&P, and NASDAQ are all trading in record territory today after plummeting this past Monday on coronavirus fears. The positive economic signals are a boost to the future outlook for energy demand. Meanwhile, the U.S. dollar is slightly higher, perhaps holding oil prices back to some degree.

Natural gas continues to trade at traditionally wintertime levels as low inventory replenishment, record heat, and increased demand for LNG in Asia, Latin America, and Europe all provide bullish sentiment. August natural gas broke the critical $4 resistance level yesterday, a price not seen since October 2018. Prices today continue to trade above that mark through February 2022. The EIA’s Weekly Natural Gas Storage Report showed an injection of 49 billion cubic feet (Bcf) vs. analysts’ forecasts calling for a gain of 45 Bcf and the five-year average of 36 Bcf. Stored natural gas now stands at 2.68 trillion cubic feet (Tcf), 16.6% lower than last year and 6% below the five-year average. Presently, the market would need to average an injection of about 88 Bcf per week to hit 4 Tcf by the start of next winter. Supplies of natural gas were flat at 92.9 Bcfd last week. Total demand was 89.8 Bcfd, up from 89.2 Bcfd the prior week with the main decrease coming from the power generation sector. Exports to Mexico were 6.3 Bcfd while exports of LNG were slightly lower at 10.4 Bcfd.

Barani Krishnan, Senior Commodities Analyst, Investing.com: There were two surprises: The first was “Black Monday,” where crude prices fell 7% – the most for a day in 16 months – followed by “Green Tuesday-to-Thursday,” where all that one-day loss was recovered over three days.

Rigzone: What were some market surprises?

Donnel: It was surprising to see U.S. oil inventories increase for the first time in two months, especially in the middle of the summer driving season, as refinery utilization and net import levels worked in the wrong direction during the week. Despite that, crude inventory levels stand below the comparable period in 2019 as overall demand, and gasoline in particular, remains robust.

Krishnan: A stock market plunge on Monday expanded into a broader risk aversion that spared no assets, including cryptocurrencies and even Treasuries. The one-time FOMO (Fear-of-Missing-Out) rally metamorphosed into a FOGS (Fear-of-Getting-Stuck) sell-off that took more than $5 a barrel off U.S. crude’s WTI. Adding to the stock market trigger was OPEC+’s first major output hike announcement in months, where the 23-nation producer alliance was to add 2 million barrels over the next five months.

But in the true nature of oil’s Kool-Aid drinking bull crowd, all of those market losses were retracted by Thursday’s close, with WTI back humming happily at above $71 per barrel despite the Energy Information Administration reporting the first U.S. crude stockpile build in nine weeks. Gasoline draws also came in at just around 121,000 barrels last week, versus a forecast drop of 1.04 million, the EIA said.

Notwithstanding the comeback rally, what doesn’t change from here is the closer attention that will be paid to new Covid cases via the Delta variety that are ramping up in many parts of the world, including the United States.

With gasoline demand expected to slowly but surely decline over the next eight weeks, all eyes will be on where the pandemic is at that point and how companies will be reopening for work in the fall. A return of more than 60% of staff to office will be great for commuting and the transportation fuels needed to drive that. Any extended concerns about the pandemic, followed by work-from-home orders, surely cannot be too bullish for oil. At that point, OPEC+ may again be forced to recalibrate supply, regardless of the notion of “tight oil” that had been overplayed for months now.

To contact the author, email mveazey@rigzone.com.