The oil rally has hit resistance as OPEC and allies prepare to meet for another crucial conference.
Despite starting the week strongly with WTI and Brent trading above $74 and $75 respectively, the oil rally looks like it’s lost a bit of traction today.
WTI prices are now floating around the $73.00 level. Brent contracts are, at the time of writing, trading for around $73.77.
OPEC JMMC’s July meeting takes place on Thursday over a background of rising Asian Covid-19 cases. The Indian delta variant continues its spread, as tensions mount regarding lockdowns and case numbers throughout Asia. Demand recovery in this geography may take longer to get going as a result.
In terms of OPEC+, forecasts suggest the cartel will acquiesce to raising output volumes in line with rising global crude demand. Its expected OPEC+ will bring 500-550,000 bpd back onto global markets from the end of July onwards.
However, OPEC’s latest forecast models suggest this may not be enough. OPEC+’s output may fall short of expected demand by 1.5m bpd in August, according to the cartel, widening to 2.2m bpd by Q4 2021.
Dubai’s ADNOC, a key OPEC member, has already stated it will be dropping export volumes by 15% in September. There is no indicator as to why ADNOC has decided to announce this cut, especially ahead of an OPEC JMMC meeting where higher output is forecast.
If OPEC’s predictions are correct, however, that does give its members space to increase production volumes. But there’s the problem of Iran to contend with.
OPEC members are watching the ongoing Iranian-US nuclear deal talks closely. Iran pumped 2.5m bpd in May 2021. Prior to tighter US sanctions, it was pumping over 3.8m bpd. Adding the 1.3m bpd to global supplies would give OPEC+ less room to increase its own output without tipping towards a market surplus.
However, no breakthrough has been made between Iran and its negotiating partner yet.
On a more positive note, jet fuel is slowly recovering. As of Monday 28th June, worldwide air travel capacity had reached 62% of 2019’s total. The US has been whitelisted by the EU for inbound tourism, while the UK has added several popular tourist destinations, like Ibiza and Malaga, to its quarantine-free green list.
On the infrastructure front, 19 US oil & gas pipeline projects are nearing completion this year. This includes brand new petroleum pipelines, as well as upgrades and overhauls to existing pipework.
The total North American rig count, incorporating US, Canadian and Gulf of Mexico sites, is 587 – some 318 higher than this time last year.
As per the EIA’s storage report for week ending June 18th, US commercial crude oil inventories decreased by 7.6 million barrels from the previous week. At 459.1 million barrels, crude oil inventories are about 6% below the five year average for this time of year. Total motor gasoline inventories decreased by 2.9 million barrels last week and are about 1% below the five-year average.
Natural gas started the week on a bullish footing after gaining 8.5% in the previous seven days. On Monday, the $3.50 level had been breached as prices hit highs not seen since November 2020.
Hot temperatures are forecast to sweep across the US, creating higher overall demand as heat builds towards the weekend. Expect to see more demand for cooling gas to offset losses in gas-for-power consumption, as per Natural Gas weather.
As well as the weather, higher natural gas exports may also support prices going forward. Natural gas exports to Mexico jumped 3% last week to 7.0 Bcf per day – new weekly average record for Mexico-bound US gas exports.
Working gas in storage was 2,482 Bcf as of Friday, June 18, 2021, according to EIA estimates. This represents a net increase of 55 Bcf from the previous week. Stocks were 513 Bcf less than last year currently and 154 Bcf below the five-year average of 2,636 Bcf. At 2,482 Bcf, total working gas is within the five-year historical range.
On the infrastructure front, 19 US oil & gas pipeline projects are nearing completion this year. Seven of the total number of pipelines are for gas, representing a mixture of new lines or upgrades to existing infrastructure. This has helped improve transportation from key production hubs to export or transmission terminals and could also support prices going forward.
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