BREAKING: Market Starts Second Half With Upbeat Tone
OPEC+ met Thursday to confirm August oil output which had been announced earlier this month. No new oil policy was debated, even as world leaders have urged oil giants to drum up supply amid inflation and recession fears.
In early June, OPEC+ decided to increase output by 648,000 barrels per day (bpd) in July and August, up from the previous quota of 432,000 bpd. OPEC+, which includes Russia, made clear Thursday there would be no additional oil production increase for August. The organization will meet again on August 3, when it is expected to decide on production quotas for September.
Major producers Saudi Arabia, which leads OPEC, and the United Arab Emirates are very close to near-term capacity limits. Political unrest in Libya and Ecuador has also threatened to further restrict the world's oil supply.
The price of crude oil has been on an upward trajectory since the beginning of last year. Prices angled sharply higher following Russia's invasion of Ukraine in February, and as global backlash against the invasion shunned purchases of Russian oil.
Demand for fuel has soared while supply has remained stagnant. Spot prices for U.S. oil briefly touched $130 in March. Gas prices have also skyrocketed.
As a result, oil and gas stocks have consistently outperformed the stock market in 2022. Increased natural gas and oil prices replenished energy industry balance sheets which took losses during the coronavirus pandemic demand crash.
Exxon Mobil (XOM), Chevron (CVX) and Shell (SHEL) have all posted healthy profits in 2022. That growth has been due largely to the price of gasoline, which has outpaced the fast-rising costs of other goods and services.
However, as the chances of a recession increase, with the Federal Reserve and other central banks imposing interest rate hikes, these factors seem to be shifting.
Crude oil prices fell 3.7% to $105.76 a barrel on Thursday. Oil fell more than 4% in June, but are still up 46% so far in 2022.
Gasoline futures dived 6.7% as concerns swing from tight refining capacity to demand destruction as high prices at the pump curb driving.
The Energy Information Administration reported two weeks of declining U.S. crude stockpiles on Wednesday, after delaying the prior week's report due to system errors. But gasoline and distillate inventories both rose 2.6 million barrels in the latest week, defying views for slim declines.
Exxon stock sank 2.6% in Thursday's market trading, falling further below the 50-day line. Chevron retreated 1.3% and SHEL stock lost 0.5% Thursday.
OPEC met quickly on Wednesday, June 29, and OPEC+ gathered on Thursday. Production and exports have been front of mind for OPEC+ and world leaders worried about high prices' impact on inflation and global growth. However, analysts did not expect much to come from this week's discussions.
"We are not expecting anything to be a shock to the market," Kpler oil analyst Homayoun Falakshahi said in an interview.
OPEC+ was unable to meet its production quota for May. The oil cartel, concerned about high prices leading to demand destruction, announced in early June it would increase its July production quota in an effort to balance Russian barrels lost to the market.
But some cartel members are unable to meet their quotas.
"The supply situation is quite tight," Falakshahi said.
The global oil supply has been in a deficit for the past three quarters, according to Falakshahi. Kpler estimates that so far in June OPEC+ exports have decreased by around 300,000 barrels per day.
"What we're seeing is the fact that OPEC+ is struggling to increase its exports despite the fact that the production cuts are easing every month," he said.
Despite struggling to produce more oil, the Group of Seven nations called this week on OPEC+ to increase supply.
"We encourage producer countries to increase their production to decrease the tension in energy markets, and in this context welcome OPEC's recent responses to tightening international markets. We call on them to continue action in this regard," G-7 leaders wrote in a June 28 communique.
The Group of Seven also agreed Tuesday to explore imposing a price cap on Russian oil, in an attempt to curb profits flowing into that country.
President Joe Biden is also preparing to visit Saudi Arabia in July. Biden is widely expected to make the case to Saudi Arabia for lower crude prices. The oil-rich country has restrained its production in recent months.
Biden told media Thursday he will be indicating to all Gulf state leaders that he thinks they should increase oil production. The president added he hopes heads of state see upping production is in their own best interest.
The U.S. and Iran resumed discussions Tuesday to revive the 2015 nuclear agreement between the two countries, the Wall Street Journal reported.
If the U.S. reaches deals with Saudi Arabia and Iran, Kpler estimates that nearly 2 million barrels per day could enter the global supply by September.
However as long as oil demand stays high, the market should remain bullish and prices will likely stabilize around $120, according to Falakshahi.
While high prices in the past have triggered a headlong oil industry sprint to increase production, U.S. producers have held off this time. Issues with labor and material shortages have constrained efforts and driven up costs.
Instead of chasing such oil field inflation, following a harsh few years of oil-patch bankruptcies, company boards are voting instead to appease investors with share buybacks and dividend increases.
This has caused tension between oil and gas companies and the Biden administration. The White House recently accused major oil and gas companies of restraining refining levels, sending gasoline prices even higher.
Industry officials point out that refining is running near full capacity.
The American Petroleum Institute sent a letter on June 23 to Biden requesting the president focus on boosting U.S. energy production.
The trade association declared that U.S. oil and gas is "the answer in the global quest for reliable energy supplies."
U.S. oil and gas companies are reporting that supply chain issues are severely straining operations. This is according to a June survey of 134 executives conducted by the Federal Reserve Bank of Dallas.
A majority of the oil and gas executives believe U.S. crude oil production will grow by around 800,000 barrels per day by December 2022. On average, respondents also expect an oil price of $108 per barrel by the end of the year.
Many of the executives polled seemed concerned about the industry despite strong underlying fundamentals.
"Investors are still not coming back to the well, so to speak," an executive told the Federal Reserve Bank of Dallas.
Another executive commented that "the real energy crisis isn't even here yet."
This executive said the U.S. Energy Information Administration's forecast that U.S. oil production will average 12.5 million barrels per day for the next 30 years is "all but impossible."
Shale will likely tip into terminal decline in around five years as the main plays run out of locations, according to this executive.
"Unfortunately, by then, most of the individuals with incumbent knowledge about offshore and international development will have retired. The brain drain in the industry will create a real and much larger crisis in the mid-to-late 2020s," the executive said.
Please follow Kit Norton on Twitter @KitNorton for more coverage.
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As the Covid-19 pandemic wanes, many people are resisting the call to come back to their cubicles, dust off their desks and work in corporate offices. (© Gary Neill)
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