Oil retreats following OPEC+ decision as Covid fears mount

Commodities

Following a month of strong gains, oil price action has retreated.

Oil trading

OPEC & allies finally reached on the 18th last week after nearly two weeks of back and forth. OPEC+ will ramp up production 400,000 bpd every month from August onwards. These increases will stay in place until December 2022.

In practical terms, this should mean lower prices. We’ve seen oil push to new heights during the OPEC+ tussle. Tight supplies were supporting prices. In anticipation of the taps opening up, however, WTI and Brent contracts have dropped back to expected levels.

At the time of writing, oil prices had below the $70 mark for two of the three major benchmarks. WTI is currently trading for $67.15 – the same levels seen towards the end of May.

Brent is trading for around $69.40.

This is partly due to the OPEC decision, but also the very real threat of the global Covid-19 pandemic.

Despite economies like the UK cheering about freedom and lowering restrictions to almost pre-pandemic levels, the virus is still very much a threat. The delta variant, in particular, continues to push infections back to levels not seen since last summer.

This had fed into a growing sense of unease, which may explain the soft price action and retreat we’ve seen in oil prices over the past couple of days. Travel restrictions in Asia, for example, have blunted optimism around jet fuel recovery this year.

On the other hand, US oil stocks continue to fall at a rapid rate. The EIA’s crude oil inventory report for week ending July 9th showed a 7.9m barrel week-on-week fall. Oil inventories are now 8% below the five-year average for this time of year.

While US consumption appears to be healthy, it will be interesting to see how it contrasts with global volumes, particularly if more shutdowns occur.

Some are still feeling bullish. Goldman Sachs, for instance, has reiterated its belief an $80 for Brent will happen in 2021. Brent crude did almost reach that level during the recent rally, but it remains to be seen if oil can make such gains again before the end of the year.

Natural gas trading

Natural gas prices started the week on a bullish footing with prices floating around the $3.70 level.

According to EIA research, US gas consumption was up last week, driven by an uptick in power generation. For the week ended July 9th, total gas consumption was up 2.1% with a higher 3.4% week-on-week increase in natural gas consumed for power.

Despite this, more gas is being held in US inventories. The EIA report states working gas in storage rose 55 Bcf compared with the previous week for a total of 2,629 Bcf. Year-on-year, stocks are lower overall, standing at 543 Bcf less than last year and 189 Bcf below the five-year average of 2,818 Bcf.

A moderate demand outlook for the rest of the week into next week is forecast by Natural Gas Weather. Two weather systems, one bringing showers and cooler temperatures across Central, Southern and Eastern seaboard states, and another bringing hot temperatures in the Northwest, are creating a conflicting demand picture.