Oil prices strengthen as supplies tighten while natural gas heats up in intense cold
Cold sweeping through the US has been good for natural gas, whilst it’s also put a support under oil prices. But OPEC faces some tough talks when it meets next month.
Prices are stronger again, with WTI and Brent trading above $62 and $64 at the time of writing. It appears the tightening of supply, caused by a big freeze hitting much of the US Texas-based refinery infrastructure, has put a tightening on supply. Is this behind the latest price strengthening?
There are also some indicators that demand may be picking up again in the US. The EIA reported a 7.9m barrel drawdown during the week of its last report. At 461.8 million barrels, US crude oil stocks are now at their five-year average for this time of year, which suggests the US oil market may be beginning to realign and show some semblance of normality.
Recovery is still likely to be slow. But there are hopes, globally, that oil-heavy sectors will kick on soon. The UK just released its roadmap for navigating out of lockdown. It’s optimistic all social restrictions could be lifted by June, so airline stocks rallied a little on the news. Could that transfer into higher UK oil demand? Will other European countries follow suit? It depends if they can get their vaccination programmes in order.
There’s also the incoming $1.9 trillion in US stimulus coming that we’ve touched on before.
While stronger prices should be great news for OPEC and allies, there’s a split emerging once again as the cartel having to decide to keep production cuts flat or taper them in April.
Saudi Arabia, OPEC’s top producer and de facto leader, is favouring keep production cuts as they are. As it stands, OPEC has removed 7m barrels per day from daily output across its members, equating to about 7% of worldwide supply. Saudi Arabia voluntarily cut its own production further by 1m barrels.
But then there is Russia. Last week, former Russian Energy Minister and current Deputy Prime Minister Alexander Novak said the oil market had “re-balanced” itself. No prizes for guessing which direction Russia wants production cuts to take going forward.
Saudi Arabia had previously announced it will remove its own voluntary cuts, separate from the OPEC agreement, in April, but the clash between it and Russia will colour the next OPEC on March 4th.
Natural Gas trading
The freezing temperatures sweeping across the US and down into Texas have lit a fire under natural gas prices. They rose 5% across the last week, as the frigid conditions continued. Much of the US natural gas production capabilities is in Texas and has been shuttered as the state continues to deal with the cold as best it cans. Supply may have tightened as a result.
Inventories decreased 237 Bcf in the last review period, according to the EIA, but still sit above the five-year average of 2,224 Bcf, totalling 2,518 Bcf.
Temperatures are also starting to warm in Central US, which may put limits on both price action and demand. Can prices remain high? Spring is coming, which will possibly put a bit of a dampener on price action going forward.