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

Global crude oil prices have now been on  a 10-day, +$24.50/bl. rally spurred by increasing military actions on both sides of the Iran War. Furthermore, rebel groups have entered on the side of Iran. SPR inventories declined again while commercial stocks saw a minor draw. Both gasoline and distillate storages showed increases. WTI’s High was Friday’s $104.45/bl. for October while the Low was Tuesday’s $91.80 (markets were closed Monday).  October Brent crude also hit its High also on Friday at $109.95/bl. with the low on Monday at $95.95. After running “too high, too fast”, the market retreated on Friday. However, both grades settled considerably higher on the week. The WTI/Brent spread has now widened to ($5.35). This week’s prices were the highest in (90) days.

Yemen-based Houthi rebels have entered the regional conflict by attacking Saudi Arabian oil infrastructure on the Red Sea. They managed to capture the port city of Mokha and the island of Perim. Perim sits in the middle of the Bab el-Mandab Strait and essentially divides the strait into two distinct shipping lanes. Bab el-Mandab is the gateway to the Gulf of Oman. Blocking the strait would force Saudi oil shipments to move north in the Red Sea to the Mediterranean Sea, a route that would then involve circumnavigating the African continent to get to Asian markets. Saudi oil production for August was down -1.9 million bld. to about 6.0 million bld.

The US Navy hit (3) Iranian oil tankers, halting their efforts to pass through the Strait of Hormuz. Meanwhile, Iran has struck two vessels near Oman. There has been some talk that certain entities are working with Iran about safe passage “arrangements” which is part of the reason for Friday’s lower prices. Meanwhile, at its meeting last Sunday, OPEC+ agreed to maintain its current output levels for October.

 The IEA is now saying that the recovery of regular oil flows in both the Persian Gulf and Red Sea regions will not occur until next year. Furthermore, they expect demand for oil this year to drop by -2.5 million bld. to 102.4 million bld. and comparing the demand destruction to that caused by the 2008 global financial crisis. Their previous estimate indicated a decline of -1.6 million bld. In another note, the agency also reported that Russian oil refinery capacity is estimated to be -30% lower as a result of the attacks by Ukraine. Russia is the world’s 3^rd-largest exporter of refined products and this situation is playing a role in the record high diesel prices.

The Energy Information Administration’s Weekly Petroleum Status Report indicated that commercial crude oil inventories for last week decreased by -0.4 million bl. to 424.1 million and +1% above the 5-year average. The API had forecasted a -2.6 million bl. draw while analysts expected a -300k million change. Total motor gasoline inventories increased by +1.3 million bl. to 207 million bl. and are -6% below the 5-year average. Distillates increased +2.1 million bl. to 106 million bl. and -14% below the 5-year average. Refinery utilization last week was 97.8%  vs. 98% the week before representing an increase of +90k bld. to 17.6 million bld. Gasoline demand was 8.6 million bld. vs. 8.9 million bld. the prior week.  Crude imports were 6.8 million bld. vs. 6.8 million bld. the week before. Exports of crude were 3.4 million bld. vs. the prior week’s 4.5 million bld. Exports of refined products were 8.4 million bld. vs. 7.4 million bld. The SPR was -1.2 million bl. to 285 million bl. (the lowest level since 1982). Stocks at Cushing, OK were  -685k bl. to 21.8 million bl. or 30% of capacity. Production last week was 13.95 million bld. vs. 13.86 million bld. the prior week and 13.5 last year. The US oil & gas rig count was +3 this week at 591 vs. 539 last year with +2 in oil, +1 in natural gas.

Gasoline prices are now $4.295/gal., +$0.15/gal. from last week, +$0.29/gal. from last month and +$1.10/gal. from last year. Labor Day Weekend gas prices were the highest on record. Diesel prices hit a new all-time high this week of $6.055/gal. vs. $3.705 last year. Both the Iran War and the Russia/Ukraine war are the main drivers of the higher prices. Meanwhile, crack spreads reached a new record high of $112/bl. this week. The increasing diesel prices are weighing on the Fed’s decisions regarding interest rates as those impact almost everything US consumers purchase.

Wholesale prices for August rose +0.4% per the PPI report. The CPI for August held at 3.4% with energy up +2.1% and food costs +0.1%. At the start of the year, inflation was 2.4%. As a side note, analysts are also looking at the inflationary impact of AI datacenters and the shortage of microchips which is increasing those costs in everyday consumer electronics. The chance of a rate increase by the Fed has now risen to 87% in the market. Consumer sentiment fell this month to 47.8 vs. August’s 51.7 as higher prices weigh on their minds. The stock market posted gains on Friday as investors reacted to the inflation news as a positive since there is now more clarity on the action the Fed must take to reign it in. However, all (3) major US stock indexes were lower week-on-week. The USD is only slightly lower on the week as is gold.

Looking Ahead

The Houthi rebels entry into the Iran War adds another element to the possible stifling of crude shipments out of the Middle East. Logistically, holding the Perim Island would allow the rebels to launch missiles in both directions at targets moving north or south. Markets will have to watch for Saudi Arabia’s reaction while the US has stated it will not send troops to assist the kingdom. The economic noose is tightening around Iran especially with the US Navy’s direct attack on its oil tankers. There are also reports that Iran is rebuilding a damaged nuclear fuel facility high in its mountains.  NOAA is now asserting a 90% chance of a very strong El Nino system for North America as SSTs in the Pacific are +3⁰C. El Ninos tend to create mild winters for the Northern US but increased hurricane activity in the Southern US due to higher sea-surface temperatures. That could impact Gulf of Mexico production while lessening the demand for Heating Oil in the Northeast.

 Natural Gas – Fundamental Analysis

October NYMEX Henry Hub Natural Gas futures moved lower this week as traders look to the post-summer weather and as a slightly higher-than-forecasted storage injection was reported.  The week’s High was Monday’s $3.01/MMBtu while the Low was Thursday’s $2.75. Natural gas demand this week has been estimated at about 115 Bcfd while supply was thought to be 120 Bcfd. LNG exports were 18.7 Bcf while exports to Mexico were 7.3 Bcfd. In the UK, natural gas prices at the NBP were most recently higher at $27.00/MMBtu. Dutch TTF futures were also much higher at $28.00/MMBtu.  Asia’s “JKM” was quoted at $24.82/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 +40 Bcf vs. a forecast of +28 and a 5-year average of +52 Bcf.  Total gas in storage is now 3.254 Tcf, now at -1.5% below last year and 5.2% above the 5-year average.

Looking Ahead

European gas storage levels are at concerningly low levels and most of the LNG shipments making it out of the Persian Gulf are bound for Asia. Meanwhile, the US is sending out almost 19 Bcfd which is largely destined for the UK and EU. NOAA is now asserting a 90% chance of a very strong El Nino system for North America as SSTs in the Pacific are +3⁰C. El Ninos tend to create mild winters for the Northern US but increased hurricane activity in the Southern US due to higher sea-surface temperatures. The 8-14-day forecast indicates moderating temperatures in the Northeast with above-normal temperatures still existing in the Southern Tier and SW. As the heat mitigates, look for increasing storage volumes each week.