Friday Fact Check: Expectations & Surprises: Oil and Gas Industry Hits and Misses.

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Crude Rally Stair-Steps Higher
Andreas Exarheas, Rigzone, January 14, 2022

In this week’s edition of oil and gas industry hits and misses, Rigzone’s regular market watchers look at the continuing rally in crude prices, Covid-19 developments, geopolitical factors and more. Read on to find out what they had to say.

Rigzone: What were some market expectations that actually occurred during the past week – and which expectations did not?

Tom Seng, Director – School of Energy Economics, Policy and Commerce, University of Tulsa’s Collins College of Business: The rally in crude that started last month stair-stepped higher this week, hitting a 9-week high as the market continued down-playing the possible impact on demand from the Omicron variant. WTI broke through the $83 per barrel mark while Brent breached $85 per barrel, despite increasing virus outbreaks, the restart of Libyan and Kazakhstani oil, and an inventory report that once again showed large gains in refined products. A weaker U.S. dollar helped increase investor appetite for oil as well. Both grades of crude look to settle higher week-on-week.

Libya’s oil production returned to around one million barrels per day as its largest oil field returned to operation after having fallen to 730,000 barrels per day. Meanwhile, Eastern Europe is seeing skyrocketing cases of the coronavirus. This week’s EIA weekly petroleum status report indicated that commercial crude inventories fell last week by 4.56 million barrels to 413 million barrels, a new three-month low and holding at eight percent below the average for this time of year. The API reported that inventories decreased by 1.1 million barrels while WSJ analysts called for a drop of 2.1 million barrels. Refinery utilization dropped from 89.8 percent to 88.4 percent. Total motor gasoline inventories rose by eight million barrels and are now three percent below the five-average for this time of year. Distillate inventories increased 2.5 million barrels but fell to 15 percent below the five-year average. Crude oil stocks at the key Cushing, OK, hub fell 2.5 million barrels to 34.8 million barrels for the first decline in several weeks. The U.S. Strategic Petroleum Reserve saw a minor draw of 300,000 barrels leading to a total of 593.3 million barrels. U.S. oil production was slightly lower at 11.7 million barrels per day, down 100,000 barrels, vs. 11 million barrels per day at this time last year. The U.S. rig count rose two last week for a total of 588 combined.

Rystad Energy is reporting that oil and gas discoveries are at their lowest level in 75 years. Only 4.9 billion barrels of new oil was discovered last year compared with 12.5 billion in 2020. Meanwhile the EIA is predicting that the daily average for oil production in 2022 will be 12.4 million barrels per day, just above 2019’s 12.3 million barrels per day. The agency also sees global oil demand increasing to pre-pandemic levels this year while OPEC will increase output.

Gasoline demand fell to an 11-month low last week on Omicron-related reductions while the U.S. national average at the pump hovers around $3.30 per gallon. U.S. air travel fell to its lowest level since last April this week crimping demand for jet fuel. Airlines are pointing to travelers concerns over Omicron as well as employees contracting the virus. All three major U.S. stock indices look to settle lower on the week after a rollercoaster week. The U.S. Dollar traded higher early week but fell late helping support oil prices. U.S. Federal Reserve Chairman Powell indicated that the central bank could fight inflation without doing harm to the economy. This sparked a rally across commodity markets but weakened the U.S. dollar.

John Stilwell, Grant Thornton, Principal-in-Charge, Energy – Power and Utilities: We continue to monitor near term market volatility in the context of the overall long term recovery trend over the past 12 months. Geopolitical factors such as supply volatility with Libya and Kazakhstan returning to the market plus OPEC+ ability to deliver on a general supply increase continue to be internal market forces. External forces such as colder temperatures hitting large sections of the U.S., the spike of Omicron variants in China and the U.S., widespread flight cancelations due to weather and workforce shortages, and the prospects of higher rates and inflation impact near term demand. Despite these near-term forces, crude has made a strong start to 2022 on a combination of global demand optimism along with interruptions to supply.

Rigzone: What were some market surprises?

Mark Le Dain, Vice President of Strategy with the oil and gas data firm Validere: The European Commission labeled natural gas, along with nuclear, as a green investment. Remains to be seen if they truly follow through but it makes perfect sense despite being a stark contrast to the view of only a few years ago. The recent energy crisis in Europe and Asia showed exactly what happens without a significant amount of gas to supplement renewables, as coal and oil generation ramping up to fill the gap but with a higher emissions impact. Natural gas is critical to the transition and many stakeholders are coming around to this. The really interesting thing is that this is during a period where certain constituents in the U.S. and Canada continue to protest natural gas, but that could be because our own energy crisis is just a few years behind. 

Stilwell: While U.S. job growth underperformed against analyst’s expectations, oilfield employment climbed in December. This continues the trend of jobs recovery from the overall pandemic related job losses. According to the Bureau of Labor Statistics and the Energy Workforce & Technology Council, a 1.1 percent growth in December was powered by gains in oil and gas extraction and machinery manufacturing. This growth is coupled with projections of an increase in upstream merger and acquisition activity into 2022. Deal flow has steadily risen in 2021 and if commodity prices remain high, the ability to execute large transactions is projected to continue to rise in 2022.

Seng: WTI’s substantial gains this week despite real evidence of widespread increases in Omicron infections continues to be baffling. Also, at some point increasing product volumes will have to impact oil feedstock prices.