Can oil sustain its $70 surge?

Oil has reached new yearly highs following last week’s OPEC+ meeting. Can it keep its rally going? Meanwhile, in natural gas, we can see a thawing in both temperatures and hot prices. 

Oil trading 

The news from last week’s OPEC+ meeting was one of cuts, cuts, cuts. The cartel has committed to keeping its production cuts static through April. Saudi Arabia’s voluntary 1m bpd cut also remains in place. 

This was great news for oil bulls, OPEC members whose budgets are tied to prices, and oil companies. Brent crude shot over $70 for the first time in twelve months, while WTI was trading around above $68. But while it’s good news for some, for importers and for prices-at-the-pump, it’s not especially welcome.  

Prices have retracted at the time of writing. Brent is now trading above $68, with WTI above $65. 

Can prices hit back over $70? Some commentators have suggested a $70 oil price will actually hurt global oil recovery.  The first victim would be gasoline prices. US fuel costs could rise to $3 per gallon – the highest since 2014 – should the cuts remain in place.  

Inflation is the watchword here. Higher oil prices, thus higher fuel prices, feeds into higher costs in other areas, such as airplane tickets, or the costs of imported goods. 

Global recovery in oil prices and markets, thought, is OPEC and allies’ end game. Despite moves towards renewable energy worldwide, the global economy still runs on oil. But, with Saudi Arabia steering the ship, its production cut-led agenda may end up hurting it in the long term. It appears the Saudis are taking a gamble on overtightening the market to get higher short-term oil revenues. 

Looking at US oil storage, the EIA reports an increase of 21.6m barrels at last printing. Total inventories stood at 484.6m barrels, bringing inventories 3% higher than the five-year average for the first time in 2021.Even so, gasoline stocks have dropped, showing a 13.6m barrel draw down, bringing levels below the five-year average by 3%.   

The Texas freeze has fed into these very high numbers. Much of the US oil & gas infrastructure is in the state, including its refinery capacity. Refineries were shuttered thanks to the record low temperatures, so the draw on gasoline is likely compensating for the drop in refining output, while also explaining the huge build up in stocks. 

Natural gas trading 

A disappointing pull from US inventories has seen natural gas prices drop to their lowest levels since January.  

Last EIA report showed a 98 Bcf drawdown, lower than the 140 Bcf figure predicted by the market. As ever, the action in natural gas is affected by the weather. 

Warmer temperatures and a thawing of the US deep freeze are dovetailing into lower natural gas demand in key geographies.  

The short-term weather forecast calls for near-record highs for this time of year, so expect weaker prices.