oil market
Oil
Benchmark oil futures lost some ground last week, as Brent dropped by 2.8% and WTI declined by 1.0% week-on-week. However, January was the fifth straight month of price gains for both oil benchmarks, with Brent gaining 3.7% and WTI up 7.1% on a monthly basis.
A strengthening US Dollar also weighed negatively on crude oil prices due to the high correlation between oil prices and exchange rates of other currencies that are priced off the US Dollar.
The drop in crude oil prices from last week’s highs was attributed to the first rise in 11 weeks of US crude oil stocks, rising US crude oil production, and a stronger US Dollar. Domestic US crude oil production has exceeded its previous high of 10mn barrels per day that was achieved in the 1970’s (Reuters). Oil production is expected to reach 11mn bpd by the end of the year and, in doing so, the US will displace Russia to become world’s largest crude oil producer. Price losses triggered by additional US output were, however, partially offset by strong Opec+ compliance to the deal rolled-over in January to restrict output and by stronger US gasoline and distillate demand.
Despite these and other price pressures, the crude oil market remains well-supported with tightening fundamentals. Goldman Sachs raised its six-month oil price forecast from $75 to $82.5.
Gas
North Asian LNG spot prices declined last week on expectations of lower future gas demand. However, sustained cold weather in China, Japan and Korea checked some of the decline. Nonetheless, prices remain significantly higher than one year ago and are still supported by the impact of the roll-over of some of this month’s buying into March.
Japan’s LNG imports rose in January to 8.7mn tonnes, which is a five-year peak, while Chinese LNG imports have declined to 4.9mn tonnes since end 2017. The severe cold weather that the region is experiencing is expected to prevail over the coming weeks. On the supply front, the new 5.2 mtpa US Cove Point LNG liquefaction facility has started testing LNG production and is due to start commercial output next March.
In the UK, NPB gas prices fell marginally at the end of the week as Norwegian flows remained high, leading to an oversupplied system. However, average temperatures in NW Europe are expected to drop significantly in the coming days leading to higher gas demand for power generation and heating. In the Netherlands, the government aims to cap production at 12 bcm at its Groningen gas field, down from 21.6 bcm. To achieve this reduction will take some time, and be gradual, and should not threaten the Dutch system’s ability to satisfy domestic demand.
US Henry Hub prices dropped after a strong rally that brought prices to a high of $3.6 per mmbtu last week. The significant decline was mainly due to a smaller than expected storage drawdown. The current spell of milder weather is, however, expected to give way to lower temperatures next week.
* Sofiane Ghezali is senior energy researcher at Abdullah bin Hamad Al-Attiyah International Foundation for Energy and Sustainable Development.
