OPEC/non-OPEC supply boost likely but keeps oil market on a knife-edge
A fortnight after an unexpected proposal to boost global oil supply by 1 million b/d emerged from a meeting of the Saudi and Russian energy ministers in St. Petersburg, the market has been left hanging in suspense as to whether or not it will be implemented.
The difference between a “yes” and a “no” has so far amounted to a spread of around $4/barrel for Brent futures, between a nervous market driving up prices towards the $80/bbl psychological mark and furiously selling off to pre-empt an increase in supply.
Should a production hike of 1 million b/d be agreed, we estimate a slump of another $4/barrel or so in Brent, cooling it to the low-$70s compared with the 42-month high close of $79.80 notched on May 23.
Between the two diametrically opposite options of raising output by 1 million b/d and keeping the current cuts intact, lies the possibility of agreeing a smaller boost, as we discussed in last weeks viewsletter. The increment would need to be at least more than 500,000 b/d. Anything less would be ineffective in countering the unintended losses from Venezuela and Iran, among others, likely leaving Brent in the mid-$70s, ready to spike again if the supply tightness worsens. As we have said before, even an increase of 1 million b/d is conservative.
Global oil production uncertainties are the highest since the Arab Spring took hold in 2011 and could swing the market into a supply shock that leaves OPEC struggling to plug the gap promptly, or worse, plugging it at all, given the group’s limited spare capacity.
These supply uncertainties arise from accelerating natural declines in conventional oil fields across the globe, amplified by sustained and severe cuts in upstream investment since 2015; delays and teething issues in the few greenfield oil projects coming online; and heightened geopolitical tensions haunting several major oil-producing countries.
Meanwhile, WTI has drifted off again, disconnecting from the global markets. August NYMEX WTI futures closed at a discount of $11.43/barrel to the corresponding ICE Brent contract on June 7, the widest since February 2015. WTI Midland, the price of tight oil in the prolific Permian basin, remains under pressure as surging production has bumped against pipeline takeaway capacity and the forward curve shows a dim view of wellhead prices until September 2019.
WTI Midland is also dragging down NYMEX WTI futures, which represent the value of barrels at the Cushing storage in Oklahoma. Such is the bearish outlook due to the Permian/Cushing bottleneck that not even a third consecutive weekly decline in Cushing stocks reported by the US Energy Information Administration on Wednesday provided any lift.
The drama around Venezuelan output and Iran sanctions has reached a crescendo. We bring you our perspective on the latest twists and what they mean for the ministers meeting in Vienna on June 22.
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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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