It’s three months since I penned my last market musings regarding the likely price developments of the summer energy season. So, ten weeks in, it was suggested that I could review those thoughts and take a stab at what the next three months may bring.
Oil
No sooner than I had suggested that the oil market looked unlikely to push above $40/bbl on fundamentals, the market duly pushed through that key resistance level. Averaging near $46/ bbl since April, the oil market has been beset with several supporting factors that have seen the benchmark front month contract trade 80% up on the January lows. Product consumption in the USA, specifically petroleum (gasoline) has driven an altogether more bullish outlook. In its latest analysis, the EIA has forecast that 2016 US consumption of petrol will surpass the previous all-time high recorded for 2007. This uptick in consumption when viewed with the slowdown in US domestic (particularly shale) production, expected to drop 750k-1m barrel per day in 2016, has certainly driven the dominant US view of oil market rebalancing. OPEC members have, despite a lack of official agreement, been able to talk the market into bullish mode merely by suggesting unlikely freezes and cuts to production levels. The facts as we move into June are that, despite the rhetoric, production figures for April show an increase on Feb and March output, suggesting if anything that higher prices are likely to delay rebalancing as producers rush to cash in on better prices. Overwhelmingly, the biggest single fundamental bullish driver has been from unplanned production outages. Canadian wildfires, the resurgence of the Nigerian Delta rebels, and supply disruptions in Libya are estimated at withholding up to 3 mbpd from the market, which is more than enough, even on a temporary basis to remove the estimated 1-2 mbpd overproduction and to bite into the record stock overhang. Technically, the markets have been driven by continued buying as investors build long positions.
No changes to the current OPEC policy and significant production disruptions are likely to see oil trade above $50/bbl in the short term. Technically, the market still looks strong on momentum based indicators, but $50/bbl is perhaps fundamentally premature when all but the current production outages are taken into consideration. A return to the market sooner rather than later and a continuation of OPEC production gains are likely to take the steam out of the market. Yes, the US will continue to consume record levels of refined product, but any sustained pricing above $50/bbl is likely not only to halt the decline in shale output but will see producers restarting production.
Gas
Gas pricing has corrected higher with oil as we have moved through the early part of summer. Despite the good availability of LNG through April and May, problems at Australia’s new Gorgon facility and a lack of exports from the US into the North Atlantic basin have reined in bearish sentiment. Norwegian Continental Shelf (NCS) maintenance has, as expected, made delivering modest amounts of gas at times difficult. Medium Range Storage (MRS) has been called upon to balance UK demand through May. Summer futures have gained near 20% from March levels. The outlook suggests that pricing at higher levels may continue, it is true to say that the oil-gas link is weakened for prompt and short forward prices, but maintenance is likely to dominate the remainder of Q2. Suggestions from Russia that it is looking to increase 2016 exports to Europe may cap the upside, but a return to prompt pricing below 30p/th looks unlikely until maintenance restrictions pass. Looking further into next winter and beyond, prices have been slightly more moderate in their bullish move. Ultimately, the disconnect between curve gas and oil pricing always proves temporary, and late April saw both markets reconnect with a “blood and thunder” 18% three-day rally. The growing dependency on gas-for-power generation has spooked those short of winter gas.
Two prognoses exist for those looking to winter gas pricing. A quieter Q3 maintenance schedule and a softening of prompt prices, as well as weather forecasts suggesting that the summer will be wet cold and windy overall, will push downwards pressure on Q4 and ultimately Q1-17 prices. Should we have oil maintaining $50+/bbl and the gas system continues to struggle to meet demand, whether it be maintenance or weather-related, then further upside to current pricing can be expected, particularly as we head towards the October annual contract round.
