Stay Informed with Tom Seng's Oil & Gas Commentary

Guardian Mineral Management presents the ‘Weekly Oil & Gas Commentary’ series, offering timely updates and expert analysis on the ever-evolving oil and gas markets. Led by industry veteran Tom Seng, this series provides valuable insights that help mineral owners make informed decisions. Stay ahead of market trends with our in-depth commentary and understand the implications for your mineral assets.

Oil – Fundamental Analysis

Crude prices fell this week as various sources report increased oil flows out of the Persian Gulf as producing countries use varying methods to bypass the Strait of Hormuz and use “ship-to-ship” transfers. Earlier in the week there were, once again, signs of optimism regarding peace talks between the US and Iran but those appear to have stalled by week’s end. A very small inventory build did not dampen the bearish sentiment while new US economic sanctions on Iran and its counterparties had no apparent impact on prices. WTI’s High was Monday’s $84.70/bl. for October while the Low was Wednesday’s $78.55 (inventory gain).  October Brent crude also hit its High on Monday at $93.80/bl. with the low on Wednesday at $85.40. Both grades settled lower on the week. The WTI/Brent spread has now tightened to ($5.95).

Some observers of oil flows out of the Middle East believe that as much as 7-8 million bld. may be flowing out of the Persian Gulf, roughly 50% of pre-war levels. Forced to deal with the open again/closed again status of the Strait of Hormuz, Persian Gulf petrostates are using any possible means to export their oil and refined products. Shortly after the Strait was closed by Iran, Saudi Arabia switched to using its East-West pipeline to deliver crude to its Red Sea port where vessels can pass through the Bab el-Mandeb Strait and out through the Gulf of Aden. Now, the Saudis are also loading cargoes in the Persian Gulf using their own, smaller tankers and moving those via the route through the Strait that is closer to Oman while turning off vessel transponders. Once into the Gulf of Oman, ship-to-ship transfers take place to larger merchant vessels which then deliver the crude to its designated markets. Qatar and the U.A.E. are said to be working jointly on a similar operation. Meanwhile, Iraq has been moving some volumes north into Turkey via pipeline then, across to the Mediterranean Sea. While these are mostly short-term fixes, the same countries are developing longer-term projects

 US/Iran settlement talks hit another impasse as the White House told mediators it won’t return to the temporary peace terms put in place in June. And Oman and Iran still have not come to a definitive arrangement for the joint management of the Strait of Hormuz, leaving its future uncertain again.

 Venezuela’s oil industry prospects continue to improve as Chevron is reportedly close to a deal to increase its already existing operations by potentially adding (2) new heavy oil fields to its holdings. Additionally, oilfield services company Halliburton is working to bring more of equipment to producers there. On the flip side, Canadian bitumen production may drop by -300k bld. next month due to maintenance in the oil sands. However, the US should see lower gasoline and aviation fuel demand as the peak summer driving/traveling season comes to an end.

 The Energy Information Administration’s Weekly Petroleum Status Report indicated that commercial crude oil inventories for last week increased a mere +95k bl. to 429 million and +1% above the 5-year average. The API had forecasted a -4.2 million bl. draw while analysts expected a +500k million change. Total motor gasoline inventories decreased by -2.5 million bl. to 207 million bl. and are -6% below the 5-year average. Distillates decreased -2.2 million bl. to 103 million bl. and -14% below the 5-year average. Refinery utilization last week was 97.4%  vs. 97.2% the week before representing an increase of +350k bld. to 17.4 million bld. Gasoline demand was 9.0 million bld. vs. 8.7 million bld. the prior week.  Crude imports were 6.2 million bld. vs. 6.6 million bld. the week before. Exports of crude were 3.8 million bld. vs. the prior week’s 4.1 million bld. Exports of refined products were 7.8 million bld. vs. 8.3 million bld. The SPR was -3.7 million bl. to 290 million bl. (the lowest level since 1982). Stocks at Cushing, OK were +1.2 million bl. to 22.4 million bl. or 30% of capacity. Production last week was 13.8 million bld. vs. 13.8 million bld. the prior week and 13.4 last year. The US oil & gas rig count was flat last week at 588 vs. 536 last year with -5 in oil, +5 in natural gas.

 Gasoline prices are now $4.09/gal., -$0.02/gal. from last week, -$0.01/gal. from last month and +$0.87/gal. from last year.  

 Claims for unemployment fell by -4k last week to 203k, less than the expected 208k. The Personal Consumption Expenditures (PCE) index, the Fed’s preferred inflation indicator, rose +0.2% in July to an annual +3.7%, higher than June. Market expectations are now that the Fed will raise interest rates next month. The Federal Reserve is holding its annual meeting in Jackson Hole, Wyoming this week and comments in Chairman Warsh’s speech tended to indicate his preference for a rate increase. The USD and bonds got a boost immediately after his talk. And, while lower after Warsh’s comments, all (3) major US stock indexes are higher week-on-week. Gold also came off of its recent highs Friday.

Looking Ahead

While there may be disagreements on exactly how much oil is making it through the Strait of Hormuz, shipments are passing, which is bearish for oil prices especially, as the summer travel season winds down. It is highly likely that Oman and Iran will arrive at a plan to “administer” the Strait and charge some levels of fees making transversing more expensive than before the war. That also will provide greater incentives for bypass initiatives. Expect refined products demand to be strong for at least several weeks as global markets play catch-up on reserves. In the US, the government will have to determine when it will look to restore volumes of crude taken from the SPR.

Natural Gas – Fundamental Analysis

October NYMEX Henry Hub Natural Gas futures saw gains this week as the September contract rolled-off Thursday. Continuing hot weather and a smaller-than-forecasted storage injection provided most of the support. The week’s High was Thursday’s $2.99/MMBtu while the Low was Monday’s $2.76. The Henry Hub contract still remains in a 7-week downtrend overall. Natural gas demand this week has been estimated at about 118 Bcfd with power consumption increasing +1.0 Bcfd while supply was thought to be 120 Bcfd. LNG exports were 18.2 Bcf while exports to Mexico were lower at 7.6 Bcfd. A heat wave continues across the EU and UK with wildfires in several areas.  In the UK, natural gas prices at the NBP were most recently higher at $22.10/MMBtu. Dutch TTF futures were also higher at $22.60/MMBtu.  Asia’s “JKM” was quoted at $23.40/MMBtu as Asian and European markets are essentially competing for the same shipments. The EIA’s Weekly Natural Gas Storage Report indicated an injection of +15 Bcf vs. a forecast of +21 and a 5-year average of +33 Bcf.  Total gas in storage is now 3.184 Tcf, now at -0.9% below last year and 5.5% above the 5-year average.

Looking Ahead

The 8–14-day forecast looks favorable for natural gas-fired generation for most of the US as record high temperatures spread more northerly. Wildfires and drought have hit several states now. While global LNG prices are strong, the US is currently exporting at maximum output. Look for domestic supply surpluses to continue which will increase storage injections as fall approaches and temperatures start to lower. Based upon current storage levels, the natural gas market looks to be in good shape for the upcoming winter.