Air Travel Demand Showing Robust Rebound

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A container ship saga in the Suez Canal and a robust recovery for commercial airlines – driven by U.S. leisure travel demand – represent some of the recent developments that have caught the attention of Rigzone’s panel of oil and gas market-watchers. Read on for their perspectives on these and other timely topics.

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

Jon Donnel, Managing Director, B. Riley Advisory Services: The demand impacts associated with COVID continue to be the primary driver of crude prices. Worldwide cases increased for the sixth straight week, and new variants are calling into question the timing and pace of re-opening plans in Europe and the United States. These factors outweighed the relatively bullish weekly inventory data, which included another uptick in U.S. refinery utilization and the continued growth in air passenger travel as tracked by the Transportation Security Administration. The saga of the tanker ship run aground in the Suez Canal dominated headlines early in the week, but the associated effects on trade and crude storage levels were understood to be transitory.

Barani Krishnan, Senior Commodities Analyst, Investing.com: It looks like most of the 23 countries in OPEC+, at the time of writing (Thursday morning), are pushing for a one-month extension of the alliance’s existing production cuts, though some were suggesting a gradual increase from May onward.

If there’s a rollover in cuts, it will hardly be a surprise for a cartel that essentially behaves like a one-trick pony that knows to do just one thing in times like these: cut.

The real surprise this week is the U.S. dataset on petroleum inventories which showed markedly higher drops than expected in both crude and gasoline stockpiles that suggest a return to more normal fuel demand one year into the COVID-19 crisis.

Tom Seng, Director – School of Energy Economics, Policy and Commerce, University of Tulsa’s Collins College of Business: The Middle East became the market focus as two major events would influence pricing this week. Both Brent and WTI are trading near last week’s prices as a tanker blocked the Suez Canal for several days while the OPEC+ group met Thursday to decide on output going forward.

The initial reaction to the stuck Ever Given tanker in the Suez Canal was bullish as traders eyed an interruption in crude supply. However, demand concerns offset that sentiment as the spread of COVID-19 variants in Europe are leading to lockdowns again. The Suez backlog of ships was estimated to exceed 260, including at least one shipment of U.S. LNG. Having finally been freed on the 29th, bearish sentiment returned as supplies continued onward to their destinations. Meanwhile, the OPEC+ group decided at its monthly meeting April 1st to incrementally increase output starting with +350,000 barrels per day (bpd) in May and June, followed by +400,000 bpd in July. The cartel cited their forecast for 2020/2021 year-on-year demand increasing by 6.2 million bpd as part of their rationale for the increase.

WTI prices did receive support this week when the Energy Information Administration (EIA) reported an increase in demand at U.S. refineries as well as, the first decline in crude inventory in six weeks. The Weekly Petroleum Status Report indicated that commercial oil inventories fell by 876,000 barrels to a total of 502 million barrels, or 6% above the 5-year average. This was in stark contrast to the American Petroleum Institute (API) report showing a 3.9-million-barrel decline. Market analysts, however, were expecting a draw of 600,000 barrels.

Refinery utilization rose 2.3% to 83.9% from 81.6% the week prior. Total motor gasoline inventories decreased by 1.7 million barrels and are now at 4% below the five-year average with the summer driving season starting at the end of next month. Distillates increased by 2.5 million barrels and are 4% above the 5-year average. Crude oil stocks at the key Cushing, Okla., hub rose 782,000 barrels to 47.1 million barrels, or 62% of capacity there. U.S. oil production increased by 100,000 bpd to 11.1 million bpd, still far below last year’s 13.0 million bpd.

Despite the pandemic, New Mexico produced a record amount of oil and natural gas in 2020 at 367.8 million barrels and, 1.9 trillion cubic feet (Tcf), respectively.

The Dow and S&P charted new highs this week while NASDAQ remains below the high set last month. Strength in the U.S. manufacturing sector and the announcement of the Biden infrastructure plan seem to be providing this upward momentum. The U.S. dollar, while moving lower, is still poised for gains week-on-week, but the lower greenback is helping the rally in crude.

Natural gas prices received a boost this week as a less-than-expected storage injection is coupled with some late season heating demand in the Upper Midwest and Northeast U.S. The EIA’s Weekly Natural Gas Storage Report showed an injection of just 14 billion cubic feet (Bcf) vs. expectations for a gain of 21 Bcf. Stored natural gas now stands at 1.76 Tcf, which is 11% lower than last year and 2% below the five-year average. Supplies of natural gas were slightly higher at 91.1 vs. 90.8 Bcf per day (Bcfd) the prior week. Total demand last week was 96.9 Bcfd, down from 100.4 Bcfd the prior week with residential usage falling the most. Exports to Mexico rose to 6 Bcfd while exports of LNG rose to 11.6 Bcfd from 11.1 Bcfd the prior week.

Rigzone: What were some market surprises?

Krishnan: The EIA reported on Wednesday a drop of 876,000 barrels of crude stockpiles for last week, compared with analysts’ expectations for a build of 107,000 barrels. 

The EIA also said gasoline inventories declined by 1.735 million barrels last week, compared with expectations for a 730,000-barrel build.

U.S. crude exports, meanwhile, climbed above the 3-million-barrel per day mark after being stagnant at around 2.5 million barrels for weeks.

Donnel: OPEC+ revised its 2021 demand forecast lower by 300,000 bpd ahead of the April 1 meeting and indications are that members are in agreement to continue the current production cuts for an additional month. The group has curtailed production by about 7 million bpd, with Saudi Arabia volunteering another 1 million cut to bolster prices. The market appears to have priced in a cautious stance from OPEC, so any changes in production plans or non-compliance with the current quotas could weigh on prices in the near term.

In fact, it was the surge in exports that really made a difference to the crude balances.

But the report wasn’t without its negatives. The most disconcerting to oil bulls would be U.S. crude production, which the EIA revised to 11.1 million bpd. While that’s just a modest 100,000 barrels above the previous week, it warrants watching as more drilling rigs are being put to work each week as WTI steadily hovers at $60 per barrel.

The oil rig count is the industry’s way of measuring future production. As of last Friday, it stood at 324, up 180 or 73% from the August record low of 244.

As for OPEC+, again at the time of writing (Wednesday), oil prices have given back most of their gains after rallying more than more than $2 a barrel initially on talk of the cuts rollover in May. That’s probably because some in the alliance were debating a gradual increase of 350,000 barrels daily in May and June and 400,000 in July.

Mark Le Dain, vice president of strategy with the oil and gas data firm Validere: United Airlines said that domestic leisure demand has almost fully recovered and American Airlines is putting more planes back into service with bookings reaching 90% of 2019 levels. This is a robust shift, given only a few weeks ago airlines were still viewing the travel recovery skeptically. A good example of the pent-up demand as soon as people feel comfortable after getting a vaccine, with the number of those people increasing every hour, day, and week.

To contact the author, email mveazey@rigzone.com.