Oil & Gas Prices - Sept 26

[dan_s]

Trading Economics:
WTI crude oil futures fell around $67.6 per barrel on Thursday, extending a nearly 3% drop from the previous session.
> My noon ET it has bounced back to $68.2 per barrel.
> This decline followed news that top exporter Saudi Arabia was dropping its crude oil price target in preparation for increased production. < This is from an article from the Financial Times that went viral ("click bait").

> Additionally, Libya’s rival factions have agreed on a process to appoint a central bank governor, which could ease the oil revenue crisis and restore exports.
> There are also lingering demand concerns, particularly in China, despite recent monetary support measures intended to stimulate activity in the world’s largest oil consumer.
> Meanwhile, EIA data showed that US crude stocks fell by 4.5 million barrels last week, exceeding the expected draw of 1.4 million barrels.
> The risk of supply disruptions in the Middle East amid escalating violence in the region is also providing some support.

Anas Alhiajji at Energy Outlook Advisors this morning: "The FT published a story this morning entitled: Saudi Arabia ready to abandon $100 crude target to take back market share. The story is misleading and doesn’t change any facts on the ground as we know them. It is a huge clickbait."

The FT Story is Misleading, Here is Why:
Saudi Arabia did not have a $100 price target. This is made up. There were media reports that Saudi Arabia needed $100 to balance the budget, but these were “theoretical” arguments. It was a great coincidence that we discussed this issue in the Daily Energy Report yesterday. Below is the text and the chart. The bottom line is that there was no price target of $100, hence there is nothing to abandon.

Summary
Saudi oil revenues have been tied to oil prices in recent years. Not surprisingly, revenues have declined as oil prices have fallen. Figure (1) shows trends in Saudi monthly oil revenues since the beginning of 2021. Data for August and September are EOA’s estimates. Any discussion of these revenues is meaningless without context.

From 22V Research:
Price support for crude oil has substantially deteriorated over the past 24 hours. Soft internals in the U.S. oil data published yesterday are quickly feeding into loosening term structures in the WTI, Brent, and Dubai futures markets. Decelerating exports of U.S. crude stand out as a key factor (detailed data are below). The trade data imply U.S. producers are facing stiffer competition in international markets. The volume of available business has been declining since early July on softer end-use product demand in Asia. The volume of competition is simultaneously rising from both Non-OPEC and OPEC+ origins. If the downshift in the pace of U.S. crude exports sustains, U.S. crude inventories would rapidly increase over the next two months beyond the normal seasonal build unless there were offsetting upstream production cuts. This pressure in turn would force cash crude prices lower around the planet. By our assessment, the probability the WTI price lands between $55 and $65 at yearend has jumped to 35% from 26%. Downside risks are still in motion and mounting.

In this context, today’s Financial Times features a front-page article that asserts “Saudi Arabia ready to abandon $100 crude target to take back market share”. There are three good reasons for investors to be skeptical of this plant and one good reason to accept it as a reflection of a real and new shift in risk.
> First, we already knew that OPEC+ now plans to start bringing back idled production capacity from December 1. That’s not news.
> Second, market stability rather than specific price level has been the Saudi objective. $100 is not “the target” now if it ever was.
> Third, we have already seen recent attempts to jawbone oil prices lower through the media (e.g., the Reuters articles amplified by Bloomberg around the U.S. Labor Day holiday three weeks ago).

This FT article feels different. Whether its central thesis truly originated with “people familiar with the country’s thinking” or the reporter’s own initiative, the article hints at another risk present all along: the potential for an October surprise in oil ahead of the U.S. presidential election on November 5. This October surprise might take the form of a sovereign-to-sovereign deal (whether formally announced or kept secret) whereby the United States provides a security pact or some other geopolitical benefit to the Saudis in exchange for an intentional and material increase in Saudi oil supply on the full understanding that such increase will knock oil prices substantially lower. < MY TAKE: Why would Saudi Arabia suddenly trust Team Biden?

Saudi crude production is presently running around 9.0 million b/d. This number was 10.5 million b/d as recently as April 2023 and 11.0 million b/d in September 2022. Two weeks ago, we observed that crude was unlikely soon to get to $55 or below on demand but could get there on supply if OPEC+ elected to retake voluntarily ceded market share (Dusty roads, 8-Sep-2024). This is a lever OPEC+ has repeatedly elected not to pull for more than 18 months in the interest of price and market stability (Rabbit or DUC?, 28-Jun-2023). Today, in part because of the catalyst of this FT article, investors must suddenly decide whether to assign greater odds that this strategy has changed, perhaps on political considerations. Realized price will be guided by whether OPEC+ elects to flood the market with oil supply or further tightens its spigot. < "Flooding the Market with oil supply" would be extremely expensive for Saudi Arabia and all of the cartel members. Would they do that to help Harris get elected? That makes no sense to me since the unrest in the Middle East has been caused by Team Biden (whoever the Puppet Master is).

Context

The weekly U.S. oil data reported yesterday by the U.S. Department of Energy (DOE) show, as we expected, a sizable draw in total U.S. crude oil inventories (–4.47 million barrels to 413 million bbls, a new five-year seasonal low). But the data also show a build in crude stocks in Cushing. We did not expect this build. Though the build is small (116 thousand barrels) and from a low base (22.7 million barrels, five-year low), it suggests the seasonal drop in the relevant crude runs has arrived about 10 days earlier than we expected. The increase also occurred despite the loss of at least 3.7 million barrels of Gulf of Mexico crude production on precautionary shut-ins during Hurricane Francine.

The real shift in risk is found in the export data. At 3.90 million b/d, U.S. crude exports were weaker than trend for the 7th week in the past 8 weeks. We had been encouraged by the previous week’s strength at 4.59 million b/d (+1.28 million b/d WoW). That contribution has lifted the four-week moving average back to 3.89 million b/d (Sep 20) from a 12-month low at 3.69 million b/d (Sep 6). But with another below-trend figure in hand, the 13-week moving average has slipped from 4.23 million b/d (Jul 26) to 4.01 million b/d (Sep 20) and the 39-week moving average has decelerated from 4.34 million b/d (Jul 5) to 4.17 million b/d (Sep 20).

The pace of these crude flows is a crucial component of all oil price formation. This factor is volumetrically larger and more impactful for price than the global liquids balance figure that commands outsized attention by analysts, investors, and the media. The move from an above-trend pace to a below-trend pace in U.S. petroleum exports can be worth as much as four million b/d when oil products are included in the calculations. If sufficiently sudden and large, this downshift will feel like the market has buckled (The conveyor belt buckles, 10-May-2023).

Coming now rather than at some other moment, this deceleration in U.S. crude exports happens to coincide with the normal seasonal drop in U.S. crude runs for October maintenance as refiners prepare for winter operations (turnaround season). DOE data show U.S. refinery utilization dropped by 1.2%-points last week to 90.9%, trimming crude runs by 124 thousand b/d WoW. Normal seasonals would reduce runs by at least another million barrels per day over the next month.

Due to this seasonal for domestic crude demand, we already knew that U.S. crude stocks would build seasonally by 20 to 25 million barrels from early October into the Thanksgiving holiday at the end of November. That is not what has changed in risk. If U.S. crude exports run closer to 3.9 million b/d than to 4.2 million b/d or more over the same time frame, then U.S. crude stocks could build by an additional 10+ million barrels over the interval.

[dan_s]

Trading Economics:
Natural gas futures remained steady at around $2.8/MMBtu, near a three-month high, after the EIA reported a smaller-than-expected storage increase of 47 billion cubic feet (vs. 52 bcf forecast). This brought U.S. gas inventories to 3,492 Bcf, narrowing the five-year surplus to 7.1%. Output was limited as energy companies cut back production, slowing storage growth. Meanwhile, Hurricane Helene is rapidly intensifying as it heads toward Florida's panhandle, expected to make landfall as a powerful Category 4 storm, potentially causing power outages and cooler temperatures. Despite the storm, Gulf Coast LNG facilities remain unaffected.

NOV24 is now the front month NYMEX futures contract for HH NGas