What is potentially behind the crude oil slide?

Crude oil futures have taken a tumble across the past week as prices fall away from their recent $70 high. Elsewhere, natural gas is buoyed by increasing US LNG exports. 

Oil trading 

It was only a couple of weeks ago we were talking about a sustained oil price rally. The $70 Brent figure was a shining oil beacon, signalling that the markets were rebalancing, demand was beginning to kick up, and 2021 might be a good year for oil. 

So, what’s happened in the past week? 

At the time of writing, WTI has retreated below $60, trading around $59, while Brent is now back at the $62 level amid some heavy unwinding in speculative long positions. Is this due to misplaced strategic thinking from OPEC+? Probably not, as its cuts had been supporting prices throughout the back end of 2020 into 2021. 

No, it’s our old friend Covid-19. We all thought vaccines would be the answers to our prayers. But with a less than satisfactory roll–out through Europe, politically motivated supply tussles, and now more questions around the AstraZeneca vaccine’s effectiveness, have all conspired to impact oil demand. 

Vaccine uptake coupled with a fresh wave of new Covid-19 cases across Europe has resulted in tighter lockdowns. France and Germany, for example, have announced more restrictions, as has Poland. The UK has also said it has had to slow its own vaccine programme, one of the best in the world, due to vaccine supply pressure. 

All of the above does not exactly show a continent putting the virus down for good, and ready to return to normality. In other bad news for oil, travel companies are bracing for another “lost year”, which essentially means no real demand for jet fuel and associated petroleum products.  

As well as the European lockdown situation, headwinds are blowing from the Middle East, specifically Iran. Record amounts of Iranian oil has been moved to China in recent months. India’s state refiners are also gearing up for an increase in Iranian oil supply, predicted Joe Biden’s White House to loosen sanctions on Iran. OPEC will likely rebalance its cuts to respond to this. 

When looking at US output, the EIA’s last crude inventories report, for the week beginning March 8th, put US refinery capacity utilisation at 76.1%. However, US rig count increased by 9 in the week beginning March 15th, reaching 411 – up 68% from August 2020’s record low. Is this a sign that more US output could be coming soon?  

U.S.  commercial crude oil inventories increased by 2.4 million barrels from the previous week. At 500.8 million barrels, U.S. crude oil inventories are about 6% above the five-year average for this time of year. 

Natural gas 

Latest EIA natural gas storage report shows an 11 Bcf drawdown in natural gas inventories for the week ending March 12th, against industry expectation of 17 Bcf. 

Why the shortfall? Domestic heating demand is likely falling away on higher temperatures throughout the US, but we may see gains in industrial natural gas demand. 

Feed gas for LNG may also help support prices. Volumes reached 11.8 Bcf on March 19th at Sabine Pass and Corpus Christi terminals – a near-record high – as Asian demand for US LNG is particularly high right now.