1. Powell hints at inclination to pause interest rate hikes in June
Fed Chairman Jerome Powell said inflation is now well above the Fed’s target, but policy rates may not have to rise as high as they have in the past because of tighter bank credit conditions. As of now, the CME “Fed Watch” tool shows that the market expects the probability that the Fed will pause interest rate hikes in June has risen to 84%. Minneapolis Fed President Neil Kashkari, who is regarded as the “new eagle king”, also said that he may support a pause in raising interest rates in June.
2. According to CNN, U.S. Treasury Secretary Yellen told bank CEOs that more consolidation may be necessary as the banking industry is still dealing with the crisis. The comments raised concerns that more banks could fail.
3. The Iraqi Oil Minister and the Russian Oil Minister confirmed their commitment to OPEC+ voluntary production cuts by telephone. The former said in an interview with foreign media that Iraq does not want OPEC+ to further cut oil production at the next meeting in June.
4. In terms of the conflict between Russia and Ukraine, the Russian Ministry of Defense announced on the 21st that Russia has fully controlled Artemovsk (known as Bakhmut in Ukraine), an important town in the Donetsk region. But the Ukrainian side denied the Russian side’s statement on the same day.
5. G7 agrees to new sanctions on Russia
G7 leaders issued a joint statement on the 19th, agreeing to expand sanctions against Russia, further curb Russia’s use of the international financial system, and promised to provide further support to Ukraine. The U.S. Departments of Commerce and Treasury announced additional Russia-related sanctions, blacklisting nearly 200 individuals, entities, ships and aircraft. In addition, Biden announced $375 million in military aid to Ukraine.
Oil prices fell on Friday, though WTI and Brent both posted their first weekly gains in a month amid fears that policymakers would be unable to reach an agreement to raise the debt ceiling and lead to a default. Rise, the increase is about 2%.
On the supply side, oil prices initially rose but pared gains after Republicans in the U.S. House of Representatives and the Biden administration suspended discussions on the debt ceiling. The U.S. Treasury Department expressed concern, warning that the government may not be able to pay all its debts by June 2, although a White House official mentioned that a debt ceiling agreement could still be reached. In addition, the U.S. crude oil rig count, a leading indicator of future production, fell by 11 to 575, the biggest weekly drop since September 2021.
On the demand side, markets were rattled by comments from Federal Reserve Chairman Jerome Powell, who said inflation was “well above” the Fed’s target. In addition, he also mentioned that the next interest rate action has not yet been decided, which led to declines in US stocks, US bond yields and the dollar. Still, some support was provided by Treasury Secretary Yellen’s reassurance of the stability of the U.S. banking system in a meeting with bank chief executives. In addition, National Australia Bank analysts expect higher Chinese demand in 2023, which could push oil prices higher. China’s refinery output has been kept high to meet domestic fuel demand and to build inventories ahead of the summer tourist season.
Markets are increasingly concerned about weakening demand for U.S. crude oil, given uncertainty about the debt ceiling and the possibility of further rate hikes. However, market expectations of higher Chinese demand in 2023 could offset the aforementioned negative factors and push oil prices higher. It is therefore crucial to keep a close eye on the progress of the debt ceiling discussion and any subsequent decisions by the Fed, as these factors could have a significant impact on oil price movements.
Commodities Analyst Barani Krishnan
Last week, the U.S. Department of Energy disclosed a plan to replenish the Strategic Petroleum Reserve (SPR), but with the disclosure of the most anticipated announcement in the crude oil market in the past-the middle of the year, what is waiting is not a carnival for crude oil bulls, but a dull decline in oil prices. The following will briefly explain why SPR supplementation is inappropriate at this time:
All we know is that the DOE has announced it will buy 3 million barrels of crude oil and more later this year, no one outside the government knows how many barrels it will end up buying, and we don’t even know if the government itself knows how much it will buy.
SPR replenishment will be determined by crude oil prices. The government department stated at the end of last year that its goal is to start supplementing around US$67-72 per barrel. If it exceeds this range, the US Department of Energy will suspend purchases. This is correct. I am very happy that the government has begun to supplement SPR. But in reality, it is possible to suspend replenishment after 20%, because rising oil prices may no longer be conducive to replenishment. Bulls in the market better think twice if they think the government can get more money to fill up the Strategic Petroleum Reserve
The DOE’s internal view is that there is not as much need for SPR today as it was 50 years ago, and its importance is undeniable. However, today there are many other ways to get the oil you need.
Although Western sanctions against Russia undoubtedly constitute the largest source of crude oil supply losses, in addition to OPEC+ production cuts, global crude oil production has begun to recover from the severe disruption caused by the epidemic. And Russia exports and produces vast amounts of crude oil, reneging on its promises to Saudi Arabia, a key OPEC+ ally.
In North America, despite the current wildfires and occasional pipeline problems, Canada remains a steady source of crude oil supplies for the United States, supplying slightly more than half of U.S. demand. Domestic production in the U.S. has also held steady at around 12 million bpd, down only about 1 million bpd from its three-year high. The U.S. Energy Information Administration (EIA), part of the U.S. Department of Energy, also said in a forecast that U.S. shale oil production will rise to an all-time high in June.
Outside the US, Iraqi production is expected to grow by 25% over the next five years. In related news, Iran’s crude oil exports are at their highest level since 2018 despite sanctions imposed during the Trump administration. In Venezuela, Chevron will begin a new phase of production ramp-up next month.
Finally, Guyana’s crude oil exports jumped 164% last year. Rystad Energy also estimates that Juana will produce 1.7 million bpd of crude oil by 2035, higher than other major offshore basins, including the Gulf of Mexico, making the country the world’s fourth-largest offshore crude oil producer.
In my opinion, WTI crude oil prices will close around $70-74 in the coming week.
At present, WTI crude oil futures are trading below $72. Before the announcement of the results of the negotiations between US President Biden and House Speaker McCarthy today, investors still maintain a wait-and-see attitude. Oil prices are expected to consolidate around this level. In addition, according to Reuters, the G7, the European Union and Australia agreed to impose a price cap of $60 per barrel on Russian seaborne crude oil and set a price cap on Russian crude products.
Earlier, oil prices rebounded strongly after forming a double bottom near the March 20 low of $64.28. WTI Crude Oil is currently trading within a pennant pattern on the 4-hour chart, indicating a contraction in volatility. Among them, the upward trend line of the pennant began at the May 15 low of $69.39, while the downward trend line began at the May 10 high of $73.81.
Looking ahead, a break below the May 15 low of $69.39 for WTI crude would exacerbate the downside risk, potentially pushing oil down to the May 4 low of $67.47. A break below that level would send oil prices further down towards a 17-month low of $64.31. On the upside, if the oil price breaks through the May 10 high of $73.8, it is expected to rise further to the May 2 high of $76.06, and further break through this level, and the oil price may hit the April 26 high of $78.
U.S. shale oil production is set to hit a record high next month and U.S. shale supply is set to post its smallest increase this year. Both media reports are accurate but have different meanings. U.S. tight oil production is expected to continue to expand, albeit at a slower pace, according to the latest U.S. Energy Information Administration (EIA) drilling report. Production in seven major U.S. shale basins is expected to rise to an all-time high of 9.33 million bpd in June from 9.29 million bpd in May. However, the monthly increase of 41,000 bpd was the smallest increase this year. What’s more, back in January, the EIA forecast that tight oil supply would hit 9.3 million b/d in February. That level is now not expected to be reached until next month, which represents a downward revision from previous forecasts.
It’s also worth noting that the EIA drilling report shows that production from wells is leveling off as drillers exhaust good-quality play. Production from new wells per rig in the U.S. shale region was flat in April. Meanwhile, the rig count continued to decline in April, with rigs falling to a seven-month low of 680. So it’s no surprise that the number of rigs completed has surpassed that of new rigs for the fourth month in a row. The result was another drop in the number of wells drilled but not completed (DUCS), which fell to a nine-year low of 4,863 in April
Baker Hughes also echoed the pullback in drilling activity. Year-to-date, the U.S. oil rig count fell 5.6% to 586, the lowest since last June, the latest data from the crude services provider showed. While that’s up slightly from year-ago levels, it’s still a far cry from the peak count of nearly 900 rigs in early 2019 during the U.S. shale boom. As the rig count plateaus, it’s a safe bet that shale supply growth will decelerate and get stronger.
Red flags for the U.S. shale industry can be gleaned not just from the EIA report, but also from the Financial Times report that a lack of demand has forced some operators to auction off drilling rigs as shale drilling has stalled , the equipment auction marks a stark change in shortages in the immediate aftermath of the pandemic. In addition, the wave of mergers and acquisitions in US shale has not materialized all the time. The windfall from last year’s record cash flow has fueled expectations for a flurry of mergers and acquisitions. However, the size of U.S. oil and gas deals fell to a two-year low in the first quarter of this year, according to data from energy analytics firm Enverus.
Even if inflation has passed from past periods of double-digit gains, this benefit alone is unlikely to revive the level of drilling. U.S. shale production could decline much faster than expected. The data released by the EIA last week showed that domestic crude oil production in the United States decreased by 100,000 barrels to 12.2 million barrels per day. Since the end of last year, US crude oil production has remained stable around this level.