Crude Oil, Natural Gas Prices Rally After Storage Reports

The sun behind a crude oil pump jack in the Permian Basin in Loving County, Texas, on Nov. 22, 2019. Angus Mordant/Reuters

Crude oil and natural gas futures rallied on Thursday after the U.S. government reported the latest domestic storage data.

According to the Energy Information Administration (EIA), U.S. crude oil inventories increased by 7.648 million barrels for the week ending Feb. 17, down from the previous week’s build of 16.283 million barrels. This was also higher than the market estimate of 2.083 million barrels and represented the ninth consecutive weekly jump in domestic stocks.

Gasoline supplies declined 1.856 million barrels, down from the 2.317-million-barrel increase last week. Heating oil stockpiles rose 597,000 barrels, while distillate inventories surged by 2.698 million barrels.

In a separate EIA storage report, national natural gas stocks fell 71 billion cubic feet, topping market estimates of negative 67 billion cubic feet. This was up from the 100-billion-cubic-foot drawdown in the previous week.

In total, U.S. natural gas supplies stood at 2.195 trillion cubic feet, up 395 billion cubic feet from the same time a year ago. They are also 289 billion cubic feet above the five-year average of 1.906 trillion cubic feet.

April West Texas Intermediate (WTI) crude futures finished the Thursday trading session up $1.52, or 2.06 percent, to $75.47 a barrel on the New York Mercantile Exchange. U.S. oil prices notched their first gain in seven sessions.

Brent, the international benchmark for oil prices, ended the session above $82. May Brent crude futures rose $0.11, or 0.13%, to $82.06 a barrel on London’s ICE Futures exchange.

Flared natural gas is burned off at Apache Corporations operations at the Deadwood natural gas plant in the Permian Basin, Garden City, Texas, on Feb. 5, 2015. Spencer Platt/Getty Images

March natural gas futures tacked on $0.145, or 6.67 percent, to $2.319 per million British thermal units (Btu).

Energy commodities have had a rough start to 2023, with WTI and natural gas prices down about 6 percent and 43 percent, respectively.

Understanding the Crude Oil Market

After generating some momentum earlier this month on China’s reopening and better-than-expected U.S. and European economic data, oil prices have slumped again.

The recent drop in WTI and Brent prices has been primarily due to renewed recession fears, fueled by shifting expectations that the Federal Reserve will continue raising interest rates heading into the summer, which would weigh on demand volumes and slow economic growth.

However, St. Louis Fed Bank President James Bullard recently told CNBC that the financial markets are overpricing a recession.

“I think markets have overpriced a recession in the second half of 2022 and overpriced a recession in the first half of 2023, and maybe they are overpricing the chances of a recession in the second half of 2023,” he told CNBC on Wednesday.

If this accurately assesses current conditions, “then oil is very underpriced,” says Phil Flynn, an energy strategist and author of “The Energy Report.”

“Oil prices have been held back on fears that rising interest rates will cause a recession and reduce demand,” he wrote. “The comments gave oil a bit of a boost after selling off on a stronger dollar and weak treasuries.”

Investors have also been monitoring fuel demand trends.

The EIA’s weekly product supplied of finished motor gasoline, which functions as a proxy for demand, has risen by more than 1.35 million barrels since the beginning of the year. In the last week, the figure has jumped by 636,000 barrels.

This has limited any downward trend in gasoline prices. According to the American Automobile Association (AAA), the national average price for a gallon of gasoline is $3.39, up 5 percent from the beginning of the year.

This year, the EIA’s February Short-Term Energy Outlook (STEO) suggested that Brent crude prices will average $83.63 a barrel and retail gasoline prices will hover around $3.39 per gallon.

Market analysts purport that global oil markets remain incredibly tight and sensitive to any supply shocks. With global demand predicted to intensify this year, prices could flirt with $100 again.

“In the medium to long term, the market is expected to tighten which should see prices moving higher from the second quarter onwards. We expect ICE Brent to average US$100/bbl over 2023, with the bulk of strength coming in the second half of the year, when we see prices averaging US$108/bbl,” wrote Warren Patterson, the head of commodities strategy at ING, in a note.

Natural Gas Nosedives

What a difference a year can make for natural gas markets.

Prices have plunged 70 percent over the last three months, mainly driven by warmer-than-usual winter weather in North America and Europe.

In addition, U.S. production volumes skyrocketed to all-time highs in late 2022, surpassing 100 billion cubic feet per day. This was coupled with the Freeport LNG outage that allowed more natural gas to circulate in the domestic market.

“So lower natural gas demand due to the Freeport LNG outage coupled with record U.S. natural gas production levels resulted in natural gas inventories shifting from below average to average levels prior to the beginning of the winter heating season in October,” said Tortoise Senior Portfolio Manager Rob Thummel in the Tortoise QuickTake podcast. “Warmer than normal weather in 2023, including a rare increase in weekly natural gas inventories in January, has elevated natural gas inventories levels to 7 percent above the 5-year average. As a result, U.S. natural gas prices have experienced the most significant peak-to-trough decline since 2008/2009.”

Although prices had slipped below the $2 market in intraday trading this week, Tortoise still expects prices to average $3 this year.

The EIA STEO report penciled in spot natural gas prices at $3.40 in 2023.

In other energy markets on Thursday, RBOB gasoline futures picked up $0.0424, or 1.66 percent, to $2.5926 per gallon. Heating oil futures were relatively unchanged at $2.70 a gallon.