Increased oil storage tempers optimism while weather keeps natural gas price movements grounded
In oil & gas this week, we see an unexpected rise in US storage volumes while natural gas price rallies will largely depend on the weather going forward.
Firstly, the latest EIA data showed an unexpected rise in storage volumes. The report shows 4.4m barrels were added to warehouse stocks in the last review period, against an expected drawdown of 1.2m.
We know that demand has had a mixed outlook due to restricted movement and worldwide lockdown measures, so could this be the case? It’s been tax season for the past couple of weeks, where inventory holders generally withdraw barrels to avoid big tax bills, which accounts for previous drops in storage. Maybe increased storage numbers indicate this is over, and we’re back to regular storage/use cycles.
At the time of writing WTI and Brent were trading above $52 and $55 respectively. Barclays puts $52 as the WTI average for the coming year, with Brent averaging $55.
However, there have been some small shafts of light breaking through the gloom. For instance, US refinery utilisation rose 0.5% in the last EIA review period, operating at 82.5% capacity. Gasoline production rose too, averaging 8.9m barrels per day. Total motor gasoline stocks fell 3% below the five-year average for the first time in a year too, dropping by about 300,000 barrels per day.
Additionally, crude stocks at Cushing, Oklahoma delivery hub reached lowest levels since August, falling 4.7m barrels to 52.5m barrels. Withdrawals from the delivery hub are an important barometer of oil activity because it’s the delivery hub for WTI.
Small gains must be tempered by reality. While encouraging, the above does not necessarily indicate a massive upswing in US oil demand is coming. Lockdowns are still in place, and the vaccine rollout has not been as speedy as first thought.
A stronger economy will help support oil prices, but Biden’s stimulus package has yet to materialise, so let’s keep expectations grounded going forward.
Long-term forecasts call for a bullish natural gas market, but the short-term will be dominated by changing weather systems.
The effects of colder weather in key US territories is already starting to show. The latest EIA data shows steepest winter stockpile pull of the year so far. Inventories dropped 187 Bcf to 3.009 Tcf, as US residential and business demand rises with colder temps.
Warmer weather systems forecast, however, could put strain on demand and thus lower prices moving forward.
But there is always the silver lining of LNG exports. 20 LNG vessels, carrying a combined LNG capacity of 72 Bcf left the US for overseas markets between January 14 and January 20, 2021. Rising gas power utilisation and subsequent LNG demand from Japan and also China is driving the export sector currently. Whether this remains is unclear, with projected nuclear uptake in Japan especially possibly putting a dampener on the longer term future of Asian-destined LNG exports, but in the short term, it may help offset price volatility caused by any warm weather spikes.