Benchmark crude oil futures have mixed fortunes

Oil

Benchmark crude oil futures had mixed fortunes last week, with Brent remaining almost flat and WTI conceding a new loss of 3%. The Brent remained supported by the prospects of tight market fundamentals in the second half of the year and especially by the impact of expected US sanctions on Iran. Whereas, WTI was pressured by a strong US dollar and the expectations of a hike in interest rates following strong US job data in May. The reports showing that Opec and its allies will discuss loosening their output cut deal during their upcoming meeting on June 22 has also weighed heavily on the WTI, which is also hit by domestic infrastructure evacuation constraints forcing US suppliers to offer substantial discounts. The Brent premium to the WTI has currently reached roughly $11, the largest since 2015.

Meanwhile, the US summer driving season just started with the Memorial Day holiday, and US crude stocks fell higher than expected by 3.6mn barrels last week. The crude stock draw was a result of strong demand, substantial drop in imports and export increase, which more than balanced the relatively small build in gasoline and distillate stocks. US oil drillers added two rigs to reach 861 active rigs, but specialists expect no further big additions for the rest of the year as the number of active oil rigs is sufficient for the 2018 drilling plans.

The Russian Energy Minister declared that one of the options to relax the Opec+ cut deal is to return to the pre-agreement levels (October 2016), but Reuters also reported that Opec and its allies are discussing to raise output by one million bpd. JBC energy estimates that the global crude balance in H2 is short of 0.825 mbpd, while Credit Suisse considers that Opec and Russia are likely to be able to add only half a million bpd. Saudi Arabia is deemed to have a spare capacity of two mbpd; however, the required time to bring back this capacity into life remains questionable.

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Asian spot LNG prices continued to strengthen last week, gaining more than 20% in the past three weeks and reaching their highest since early February. The prices were supported by a firm demand amid the upcoming summer maintenance season that is expected to limit supply. Demand from Chinese buyers remained firm according to experts, whereas South Korean clients are expected to rebuild their stocks.

While some clients were waiting for prices to drop, they are currently caught short to face the summer cooling demand. However, India seem likely to switch to coal if spot prices remain high. In the US, Henry Hub natural gas futures rose last week by 1%, which was the fourth straight week of gains. The storage builds in the last two weeks are thought to be smaller than usual, which led analysts to believe that the record domestic production will not be enough to replenish stocks to their five-year average, ahead of the winter.

In the coming weeks, demand is forecast to rise on expectations of the ramp up in LNG exports. In the UK, NBP gas futures increased marginally over the week due mainly to outages at several terminals like North Morecambe and Bacton However, the Birtish gas supply system seemed to be well supplied by the end of the week. The author is senior energy researcher at Abdullah bin Hamad Al-Attiyah International Foundation for Energy and Sustainable Development.

Sources and photo-credits: Gulf Times