Let’s Make a Deal

  1. OPEC+ agrees to increase production
  2. The group will add 400,000 barrels per day, per month, starting in August
  3. IEA reports demand will outstrip supply even with the new barrels from OPEC+
  4. Natural gas prices consolidate at the top of the range

Al pic 2009_cropped

Alan Levine—Chairman, Powerhouse
(202) 333-5380

 

The Matrix

Over the weekend, OPEC+ members were finally able to agree on a deal to increase production. Negotiations had stalled at the last meeting in early July. The UAE and Saudi Arabia could not agree on UAE’s requested larger baseline for future production increases. When the Saudi oil minister was asked how they were able to arrive at an agreement, Abdulaziz bin Salman said, “Why should I divulge it? This is an art, and we keep it between ourselves. We call it a state secret. Consensus building is an art… without spilling our state secret, I’ll keep it this way.” What is no secret is that the world needs more oil to satisfy returning demand. Will the OPEC+ increase be enough?

Starting in August, OPEC+ countries will begin adding 400,000 b/d per month into the market, slowly unwinding the unprecedented 10 million barrels per day cut enacted when the global pandemic slashed demand and WTI futures briefly traded at a negative price. Since then, the group slowly eased its dramatic output reduction to 5.8 million barrels per day. Under the current plan, OPEC+ production will be fully restored to pre-pandemic levels by September 2022.

The increase may prove to be too little, too late. Paris-based IEA noted in its latest report that demand should rebound 5.4 million barrels per day this year. OPEC+ nations produced 40.9 million barrels per day in June. Even with the increases just announced, the world markets could continue to tighten if the IEA’s projections of 43 to 45 million barrels a day demand globally are on target.

At home, inventories of crude oil continue to draw. In the week ended July 9, 2021, U.S. crude stocks continued their streak of declines. The EIA reported that domestic crude stockpiles fell by a larger than expected 7.9 million barrels. Exports of U. S. crude were strong, with 4.25 million barrels headed to buyers outside the country. U.S. crude oil stocks are now running 40 million barrels below the five-year average.

Will the U.S. shale producer come to the rescue? Domestic producers are focused on paying down debt and giving returns to shareholders, a big switch from the “drill, baby drill” mentality of years past. It also stands to reason that the oil patch is subject to the same labor and supply chain constraints hitting almost every industry today. And even if U.S. producers decided to open the taps today, there would be a lag before we saw meaningful changes in production.

So, even with the news hitting that OPEC+ has a deal, analysts are holding firm on their call for higher prices through the end of the year. The rising global cases of the delta variant remain a wildcard adding volatility to the situation. It is no question that if your budget is exposed to higher prices, you should be hedged.

 

Supply/Demand Balances

Supply/demand data in the United States for the week ended July 9, 2021, were released by the Energy Information Administration.

Total commercial stocks of petroleum rose 2.5 million barrels during the week ended July 9, 2021.

Commercial crude oil supplies in the United States decreased by 7.9 million barrels from the previous report week to 437.6 million barrels.

Crude oil inventory changes by PAD District:

PADD 1: Plus 0.6 to 8.6 million barrels

PADD 2: Down 2.0 million barrels to 121.3 million barrels

PADD 3: Down 5.3 million barrels to 236.5 million barrels

PADD 4: Unchanged at 23.9 million barrels

PADD 5: Down 1.1 million barrels to 47.3 million barrels

Cushing, Oklahoma, inventories were down 1.5 million barrels from the previous report week to 38.1 million barrels.

Domestic crude oil production was up 100,000 barrels per day to 11.4 million barrels daily.

Crude oil imports averaged 6.221 million barrels per day, a daily increase of 347,000 barrels. Exports increased 1.397 million barrels daily to 4.025 million barrels per day.

Refineries used 91.8% of capacity; 0.4 percentage points lower from the previous report week.

Crude oil inputs to refineries decreased 22,000 barrels daily; there were 16.093 million barrels per day of crude oil run to facilities. Gross inputs, which include blending stocks, fell 27,000 barrels daily to 16.643 million barrels daily.

Total petroleum product inventories rose 10.4 million barrels from the previous report week.

Gasoline stocks increased one million barrels from the previous report week; total stocks are 236.5 million barrels.

Demand for gasoline fell 760,000 barrels per day to 9.283 million barrels per day.

Total product demand decreased 2.245 million barrels daily to 19.303 million barrels per day.

Distillate fuel oil stocks rose 3.7 million barrels from the previous report week; distillate stocks are at 142.3 million barrels. EIA reported national distillate demand at 3.164 million barrels per day during the report week, a decrease of 675,000 barrels daily.

Propane stocks rose 1.6 million barrels from the previous report week; propane stocks to 59.6 million barrels. The report estimated current demand at 1.116 million barrels per day, a decrease of 12,000 barrels daily from the previous report week.

 

Natural Gas

Natural gas prices consolidated last week. Prices have been moving higher on unrelenting heat in the West. Injections into storage were more than the market expected, keeping prices within the most recent trading range of $3.52 to $3.822. Rising global LNG prices remain a bullish factor.

According to the EIA:

Working gas in storage was 2,629 Bcf as of Friday, July 9, 2021, according to EIA estimates. This represents a net increase of 55 Bcf from the previous week. Stocks were 543 Bcf less than last year at this time and 189 Bcf below the five-year average of 2,818 Bcf. At 2,629 Bcf, total working gas is within the five-year historical range.

 

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