After remaining tied for most of the second quarter, oil prices have mounted a significant rally, with first-month Brent gaining over 10% since the beginning of the month to trade at $ 83.30 a barrel. This marks the first time the contract has settled above the main 200-day moving average in nearly a full year. According to commodity analysts at Standard Chartered, oil markets are finally waking up to the fact that fundamentals have tightened significantly. Analysts have predicted that a seasonal increase in demand combined with the producer’s output constraint will create large supply deficits over the coming months.
StanChart’s demand model projects a supply deficit of 2.81 million barrels per day in August; 2.43 mb/d in September and more than 2MB/d in November and December. Analysts have also predicted that global inventories will fall by 310 mb by the end of 2023 and another 94 mb in the first quarter of 2024 thereby keeping oil markets lagging and pushing oil prices higher. According to experts, the Brent price will remain unchanged at 88 USD/bbl for the third quarter of 2024, but will rise to 93 dollars/bbl for the fourth quarter. Demand will reach an all-time high in August and then set new highs in December 2023 and again in February, March, June and August 2024. However, they have predicted that global oil demand will fall to a seasonal low of 99.33 mb/d in January 2024, the only month in the current decade when demand is expected to fall below 100 mb/d.
Oil Inventories Fall, Gas Inventories Near Record Levels
Overall, crude and natural gas inventories have moved in opposite directions, with crude inventories falling while natural gas inventories have risen.
According to StanChart, total inventories of crude oil and petroleum products fell by 7.58 mb against the five-year average to stay 17.62 mb below average. Last week, crude oil inventories fell by 0.71 mb to 457.42 mb, with crude inventories at the price point of the Santi in Cushing, Oklahoma, falling 2.89 mb to 38.35 mb. The main tightness of the inventory remains in gasoline and distillates.
Last week, petrol inventories fell 1.07 mb to 218.39 mb, and are now 17.65 mb (7.5%) below the five-year average, while distillate inventories are 19.59 mb (14.2%) below the five-year average.
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By contrast, EU gas inventories were 96.76 billion cubic meters (bcm) on July 16, 21.4 bcm higher y/y and 18.65 bcm above the five-year average. Construction over the past week averaged 319 million cubic meters per day is 109% higher than the five-year average over the equivalent period. At this rate, gas inventories in Europe will exceed 100 bcm on August 1, and will be equal to last year’s maximum as early as August. Inventories will then hit 100% of the nameplate storage capacity in early September. According to commodity analysts, EU gas inventories would be on track to complete the injection season just above 124 bcm if storage was not limited.
It is clear that the gas Buyers Club in Europe has been a tremendous success, with the continent’s gas stores nearly 80% full. Unfortunately, U.S. LNG purchases in Europe have also decreased, with June volumes amounting to 4.15 million metric tons, up from 5.63 million tons in May.
Excess gas inventories in Europe and the US remain the biggest bearish catalyst that is buffeting gas prices and it will take an unusually black swan event for the situation to turn around. The big problem here is that not only are gas inventories growing, but they are doing so in a hot hatch. The flood of gas has put near-term prices under immense pressure, with futures for gas delivered in October 2023 now trading at a discount of nearly 12 euros per megawatt-hour to prices for April 2024. They were trading at a premium of more than 5 euros at the beginning of the year and a total of 38 euros a year ago.
Asia and China become the main customers of the US
But it’s not all disaster and gloom for American gas producers, with Asia and China picking up the slack left by Europe.
U.S. LNG imports to Asia rose to 1.34 million metric tons in June, from 1.21 million in May, the most since February. Indeed, China and Asia are now the biggest U.S. LNG customers, a position Europe held last year when it bought up to 65% of U.S. production.
The largest LNG producer in the United States, Cheniere Energy (NYSE: LNG), has signed a long-term liquefied natural gas (LNG) sale and purchase agreement With Enn Energy Holdings of China.
ENN will purchase ~1.8 M metric tons/year of LNG on a free on-board basis at Henry Hub prices over a 20-year term, with deliveries to begin in mid-2026 increasing to 0.9 million tons per year (mtpa) in 2027. In the past year, ENN signed a 13-year contract With Cheniere to buy 900k metric tons / year, again based on Henry Hub prices.
The agreement is subject to the termination of Cheniere The Sabine Pass project, which is being developed to include up to three juicing trains with a total expected production capacity of ~20 million tons/year of LNG.
Currently, Sabine Pass has six units of juice fully operational aka?the” trains ” are each capable of producing ~5 mtpa of LNG for a total nominal production capacity of ~30 mtpa. Cheniere processes more than 4.7 billion cubic feet per day of natural gas in LNG. Sabine Pass has multiple pipeline connections to interstate and intra-state pipelines, and is located less than four nautical miles from the Gulf of Mexico thus providing easy access to naval vessels.
Previously, Cheniere entered another long-term liquefied natural gas sale and purchase agreement the National Oil Company in Norway Equinor ASA (NYSE: EQNR) that will see Equinor purchase 1.75 m metric tons/year of LNG on a free onboard basis for a purchase price indexed to the Henry Hub price, for a 15-year term.
By Alex Kimani Oilprice.com
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