Crude came under some downward pressure mid-week from data showing another build in US crude stocks, but did not yield much ground. It was back under the influence of fundamentals and the fundamentals remain strong. Front-month May ICE Brent futures contract began above $70 Monday and expired comfortably above that psychologically important level Thursday, in a week shortened by the Easter holiday in several parts of the world.
Hawkish comments around the fate of the OPEC/non-OPEC supply cuts beyond the December 2018 expiration of the current agreement brought the bulls back out in full force. The prospect of a watershed agreement to keep Russia aligned with OPEC in its supply-management strategy for the next decade or two promises a whole new era in the oil market.
Saudi Crown Prince Mohammed Bin Salman, a powerful voice on the kingdom’s energy policy, told Reuters in an interview in New York March 26 that Saudi Arabia and Russia were “working to shift from a year-to-year agreement to a 10- to 20-year agreement” on coordinating oil supply.
The comment was in line with ongoing efforts within OPEC to institutionalise its collaboration with the 10 non-OPEC producers led by Russia, forged at the end of 2016. Saudi Energy Minister Khalid al-Falih, current OPEC President Suhail al-Mazrouei and Secretary-General Mohammed Barkindo have alluded several times in recent months to a new, more enduring framework of cooperation with the non-OPEC producers. However, MBS’ words, and the reference to a 10- to 20-year timeframe, lent more gravity to the picture of the evolving OPEC and non-OPEC relationship.
An “exit” from the supply cuts, it appears, is no longer in the line of sight. Several producers in the pact have suggested a six-month extension beyond December, Iraqi oil minister Jabbar al-Luaibi told an industry conference in Baghdad Wednesday. Barkindo, speaking at the same event, said six more countries had expressed “solidarity” with the OPEC/non-OPEC efforts to restrain supply, though he did not identify them.
Saudi Arabia’s Al-Falih had hinted earlier this month that the OPEC/nonOPEC production cuts could go beyond December 2018. The first quarter of a year typically sees a build in oil inventories, as a result of which, lifting the curbs in Q1 2019 would not be a good idea, he said in a Bloomberg interview.
Sticking with a degree of supply restraint and cementing a framework that enables active management by 24 or more producers is the obvious way forward to preserve a hard-earned equilibrium in the oil market, and one that may remain fragile for a while. Is OPEC going to become “super-OPEC”? It already has, in our view, and the label doesn’t really matter.
Meanwhile, Baker Hughes reported a drop of seven in the number of oil rigs drilling in the US to 797 in the week to March 29, rekindling doubts over the shale sector’s projected resurgence in 2018.
Yemen’s Houthi rebels resuming firing of missiles into Saudi Arabia, growing fears over the fate of the Iran nuclear deal at the hands of a belligerent US administration, sliding Venezuelan output and geopolitical crimps on production in Nigeria and Libya are all conspiring to keep the oil market on tenterhooks. The second quarter promises to be anything but a seasonal lull.
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This winter, natural gas prices have been at their lowest levels in decades. On Monday, February 10, the near-month natural gas futures price at the New York Mercantile Exchange (NYMEX) closed at $1.77 per million British thermal units (MMBtu). This price was the lowest February closing price for the near-month contract since at least 2001, in real terms, and the lowest near-month futures price in any month since March 8, 2016, according to Bloomberg, L.P. and FRED data.
In addition, according to Natural Gas Intelligence data, the daily spot price at the Henry Hub national benchmark was $1.81/MMBtu on February 10, 2020, the lowest price in real terms since March 9, 2016. Henry Hub spot prices have ranged between $1.81/MMBtu and $2.84/MMBtu this winter heating season (since November 1, 2019), generally because relatively warm winter weather has reduced demand for natural gas for heating. Natural gas production growth has outpaced demand growth, reducing the need to withdraw natural gas from underground storage.
Dry natural gas production in January 2020 averaged about 95.0 billion cubic feet per day (Bcf/d), according to IHS Markit data. IHS Markit also estimates that in January 2020 the United States saw the third-highest monthly U.S. natural gas production on record, down slightly from the previous two months.
IHS Markit estimates that U.S. natural gas consumption by residential, commercial, industrial, and electric power sectors averaged 96 Bcf/d for January, which was about 4.4 Bcf/d less than the average for January 2019, largely because of decreases in residential and commercial consumption as a result of warmer temperatures.
However, IHS Markit estimates that overall consumption of natural gas (including feed gas to liquefied natural gas (LNG) export facilities, pipeline fuel losses, and net exports by pipeline to Mexico) averaged about 117.5 Bcf/d in January 2020, an increase of about 0.2 Bcf/d from last year. This overall increase is largely a result of an almost doubling of LNG feed gas to about 8.5 Bcf/d.
Because supply growth has outpaced demand growth, less natural gas has been withdrawn from storage withdrawals this winter. Despite starting the 2019–20 heating season with the third-lowest level of natural gas inventory since 2009, by January 17, 2020, working natural gas inventories reached relatively high levels for mid-winter. The U.S. Energy Information Administration’s (EIA) data on natural gas inventories for the Lower 48 states as of February 7, 2020, reflect a 215 Bcf surplus to the five-year average. In EIA’s latest short-term forecast, more natural gas remains in storage levels than the previous five-year average through the remainder of the winter.
According to the National Oceanic and Atmospheric Administration (NOAA), January 2020 was the fifth-warmest in its 126-year climate record. Heating degree days (HDDs), a temperature-based metric for heating demand, have been relatively low this winter, which is consistent with a warmer winter. During some weeks in late December and early January, the United States saw 25% to 30% fewer HDDs than the 30-year average. This winter, through February 8, residential natural gas customers in the United States have seen 11% fewer HDDs than the 30-year average.
Source: U.S. Energy Information Administration, based on National Oceanic and Atmospheric Administration Climate Prediction Center data
Headline crude prices for the week beginning 10 February 2020 – Brent: US$53/b; WTI: US$49/b
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