drilling activity

The Commodities Feed: Oil dips following hawkish comments from Fed Chair Powell The oil market has been unable to escape the pressure from a more hawkish Federal Reserve. And this is despite a supportive inventory report from the Energy Information Administration (EIA) Energy – Fed talk pressures the energy complex The oil market buckled yesterday as a result of further hawkish comments from Federal Reserve Chair Jerome Powell during his second day of congressional testimony. ICE Brent fell almost 3.9% on the day towards US$74/bbl. And this weakness has continued this morning. A more hawkish Fed overshadowed what was a fairly constructive EIA report. US commercial crude oil inventories fell by 3.38MMbbls over the last week, more than the 1.2MMbbls draw the American Petroleum Institute (API) reported the previous day and more than the market was expecting. Crude oil exports played a part in this draw, rising by 1.27MMbbls/d WoW to 4.54MMbbls/d. On the product side, small builds of 479Mbbls and 434Mbbls were seen in gasoline and distillate fuel oil respectively. In addition, implied US oil demand (total product supplied) hit 20.93MMbbls/d over the week – the highest number seen since December. Middle distillates remain well supported with the prompt ICE gasoil crack remaining above US$20/bbl, whilst the prompt time spread remains in deep backwardation. The latest data from Insights Global show that gasoil inventories in the Amsterdam-Rotterdam-Antwerp (ARA) region continue to decline with them now standing at 2.04mt, which is below the five-year average and levels not seen since the start of the year. Refinery outages appear to be driving this tightness, which should continue to support middle distillates at least in the short term. There is very little on the calendar today for energy markets. Baker Hughes will release rig count data and if it continues to follow the trend seen so far this year, we can expect a further decline in drilling activity. Higher costs have likely contributed to slower drilling activity. The latest Dallas Fed Energy Survey shows that 60% of producers see drilling and completion costs per well to end this year higher than where they ended 2022. Today's other regular release on the calendar is the latest positioning data from the Commodity Futures Trading Commission (CFTC) and ICE. Given the move in the oil market over the last reporting week and the increase in open interest, we could see the net speculative long in ICE Brent having grown over the week. This is even more the case for ICE gasoil, where open interest has increased from a little under 706k lots to more than 720k lots over the reporting week.

The Commodities Feed: The need for a risk premium The oil market has opened slightly stronger this morning and this is no surprise given recent developments in Russia. However, the failed move by the Wagner group suggests that any upside in prices will likely be limited. Energy - Russia instability offers limited upside to oil It was shaping up to be an interesting opening for oil given developments in Russia towards the end of last week. However, the Wagner group's insurrection came to an end as quickly as it started thanks to a deal brokered by Belarus’ Lukashenko. As a result, oil has only seen limited gains so far in early morning trading today with ICE Brent up a little over 1%. While the immediate supply risks have disappeared, the market will likely have to start pricing in a larger risk premium for oil given the growing instability in Russia. How much of a risk premium will really depend on how the aftermath of the failed insurrection is dealt with. In the US, the oil rig count has continued to trend lower. The number of active oil rigs has fallen by 6 over the last week to 546, which is the lowest level seen since April last year. The rig count has fallen by 77 since mid-January and the slowdown in drilling activity will call into question how much supply growth we will see from the US. Falling drilling activity in the US will be welcome by OPEC+ members, as in theory, it should make their output policy more effective, though demand has been a big concern for the market which has more than offset the recent cuts seen from OPEC+ members. The latest positioning data shows that speculators increased their net long in ICE Brent by 16,116 lots over the last reporting week to 190,386 lots. This move was predominantly driven by fresh buying with the gross long increasing by 12,996 lots. However, given the price action seen since the last reporting week, we are likely to have seen some of these longs liquidate already. The net speculative long in ICE gasoil increased by 12,250 lots to 16,191 lots over the week. This was largely driven by short covering. The gross short declined by 10,319 lots over the period. Refinery outages have been supportive for middle distillates in recent weeks and if these outages continue, there is room for further short covering. There is very little on the agenda for energy markets this week with the exception of the regular weekly releases.

The Commodities Feed: More positive US data Oil edged higher yesterday following some good US macro data. However, this data also increases the likelihood of further rate hikes. And the expectation of further hikes will ultimately provide resistance to commodity prices moving significantly higher. Energy - ARA gasoil inventories fall further The oil market managed to edge higher yesterday with ICE Brent settling a little more than 0.4% higher on the day. This follows first-quarter US GDP being revised significantly higher, while jobless claims also fell over the week. However, stronger-than-expected US macro data also increases the likelihood of further rate hikes from the Fed. Growing expectations of further hikes is one of the factors which is capping the upside in the market, while on the downside, the belief that OPEC+ will take further action if there is significant further weakness provides a floor to the market. As a result, the oil market continues to trade in a fairly rangebound manner. The latest data from Insights Global shows that gasoil inventories in the ARA region fell by 35kt over the last week to 2mt. This is the lowest that gasoil inventories have been in the region since December and stocks are now around 300kt below the 5-year average for this time of year. It is this tightening which continues to provide support to middle distillates with the ICE gasoil crack continuing to trade around the US$20/bbl level. Refinery outages have contributed to the tightening, but a return of these refiners, the ramping up of new capacity over 2H23 and demand concerns suggest that further upside is likely limited. China will be releasing PMI data today. The manufacturing PMI has been in contraction territory for the last two months and the expectation is that we will see yet another contraction over June. A weak set of data will not be great for commodities, particularly for the metals complex. Other releases on the calendar for today include the Baker Hughes US rig count data. And if the trend seen for the last several months holds, we will likely see a further slowdown in US drilling activity. In addition, the CFTC and ICE will be releasing their latest Commitment of Traders reports. Price action over the last reporting week suggests that speculators should have reduced their net long position in ICE Brent.

Tighter oil market over the second half of 2023 Fundamentals are not dictating oil prices at the moment. Instead, macro uncertainty and concerns over the China recovery are proving an obstacle to oil prices moving higher. In addition, expectations for a more hawkish US Fed will certainly not be helping risk appetite. Speculators have reduced their positioning in the market considerably in recent months. ICE Brent has seen the managed money net long fall from a year-to-date high of around 300k lots in February to around 160k lots in the last reporting week. This has predominantly been driven by longs liquidating, although there has also been a fair number of fresh shorts entering the market. We still expect global oil demand to grow by around 1.9MMbbls/d in 2023, and while this may appear aggressive in the current environment, it is more modest than some other forecasts – for example, the International Energy Agency forecasts demand to grow by 2.4MMbbls/d this year. Whilst we believe that our demand estimates are relatively modest, there are still clear risks to this view. The bulk of demand growth this year (more than 50%) is expected to be driven by China. So far this year, indicators for Chinese oil demand have been positive, as the economy has reopened. However, the concern is whether China will be able to keep this momentum going through the year. The risk is that the growth we have seen in domestic travel starts to wane as the effects of 'revenge' spending ease. Supply-side dynamics continue to provide a floor to the market. OPEC+ continues to cut and we have seen Saudi Arabia announce further voluntary supply cuts through the summer. Recently-announced cuts from Saudi Arabia, Russia and Algeria amount to a reduction of a little over 1.5MMbbls/d in supply over August 2023. Although, there are doubts over whether the 500Mbbls/d of cuts recently announced by Russia will be followed. It doesn’t appear as though Russia has stuck to a previous cut of 500Mbbls/d when you consider that Russian seaborne crude oil exports have been strong for most of the year. Drilling activity in the US has also slowed this year with the number of active oil rigs in the US falling from a year-to-date peak of 623 in mid-January to 545 recently, which is the lowest level since April 2022. While supply growth is still expected from the US, and output is set to hit record levels, the growth will be much more modest than in previous years. For 2023, US oil output is expected to grow in the region of 600-700Mbbls/d, while for 2024 growth is expected to be less than 200Mbbls/d. Higher costs, a tight labour market and an uncertain outlook all contribute to this more tepid growth. While the broader theme we have seen from US producers in recent years is to also be more disciplined when it comes to capital spending. We have revised lower our oil forecasts for the latter part of the year. A more hawkish Federal Reserve, limited speculative appetite (given the uncertain outlook), robust Russian supply and rising Iranian supply all suggest that the market will not trade as high as initially expected. We still forecast that the market will be in deficit over the second half of the year and so still expect the market to trade higher from current levels. We forecast ICE Brent to average US$89/bbl over 2H23.

The Commodities Feed: Further US SPR purchases The oil market had a strong end to the week following the extension of Saudi voluntary cuts earlier in the week. For this week, markets will be focused on US CPI data on Wednesday, whilst specifically for the oil market, we have the IEA and OPEC oil market reports released later in the week. The oil market managed to pull off a second consecutive week of gains with ICE Brent settling almost 4.8% higher last week. Cuts from both Saudi Arabia and Russia have provided some support, although the market will have to continue to contend with macro uncertainty, which has capped the market over the last couple of months. The recent action taken by Saudi Arabia will likely provide some comfort to longs as it sends the signal that the Saudis are committed to putting a floor under the market. The latest positioning data shows that speculators increased their net long in ICE Brent by 25,106 lots over the last reporting week to 184,906 lots as of last Tuesday. This move was predominantly driven by fresh longs entering the market, with the gross long increasing by 16,881 lots. Meanwhile, for NYMEX WTI, speculators increased their net long by 23,820 lots to 95,363 lots. This was driven almost exclusively by short covering. At 112,155 lots, the gross short in WTI is still sizeable and so with the right catalyst, there is the potential for a short-covering rally. Another factor which is providing some degree of support to the market is the refilling of the US Strategic Petroleum Reserve (SPR). On Friday the Department of Energy (DoE) announced that it will be looking to purchase around 6MMbbls of US sour crude oil for delivery in October/November. Up until now, the DoE has successfully tendered for 6.3MMbbls, with this volume set to be delivered in August and September. There had been reports that the DoE was looking to buy roughly 12MMbbls this year, and if we see the total volume awarded in the latest announcement, that would get us to this 12MMbbls already. A large explosion at a Mexican platform, which was sadly deadly, saw Pemex reduce oil output by 700Mbbls/d. However, the bulk of these shut-ins appears to have been precautionary and 600Mbbls/d of this output has already returned, according to the company. Drilling activity in the US continues its decline with the latest data from Baker Hughes showing that the number of active US oil rigs fell by five over the week to 540. This is the lowest number since early April 2022. The number of active oil rigs in the US has fallen by 81 since the start of the year. Lower drilling activity suggests more limited supply growth. And this is a trend that we have seen in the EIA’s US crude oil supply forecasts with less than 200Mbbls/d of US supply growth expected in 2024. The EIA will release its latest Short-Term Energy Outlook on Tuesday, which will include US production forecasts for the remainder of 2023 and 2024. In addition to the EIA’s Short-Term Energy Outlook release on Tuesday, both OPEC and the IEA will release their latest monthly oil market reports on Thursday. Given the macro uncertainty, the market will likely be focused on any changes to demand forecasts in both reports. Away from energy markets, the big macro release this week will be US CPI numbers on Wednesday, which will likely further shape market expectations on how much more monetary tightening we could see from the US Federal Reserve in the months ahead.