Commodities
Despite $90 crude, US oil output capped by weak natgas prices
By Liz Hampton
(Reuters) – oil prices last week climbed to their highest this year, but a weak market, steeper costs and a focus on shareholder returns over new production are keeping shale drillers from big output increases in the world’s top oil and gas producer.
The global benchmark last week was trading above $91 a barrel, while in the U.S., West Texas Intermediate (WTI) futures were over $86 a barrel, their highest since October. [O/R]
The price gains reflect supply risks from attacks on Russian oil infrastructure and global shipping, as well as ongoing output cuts by the Organization of the Petroleum Exporting Countries and allies (OPEC+).
Bank of America in early April increased its 2024 Brent and WTI price outlook to $86 and $81 per barrel, respectively, and said both were likely to peak around $95 a barrel this summer.
Those higher prices so far have not been enough to entice U.S. drillers to boost production, operators and service firm executives said, as many are grappling with a steep decline in the value of gas produced alongside their oil.
In Texas, Louisiana and New Mexico, producers were already cutting output in the first quarter as costs climbed. The breakeven price to drill a new well in the Permian, the top U.S. shale field, rose $4 per barrel in the last year, according to a survey by Federal Reserve Bank of Dallas.
Now, low gas prices are creating new challenges.
Henry Hub futures, the benchmark for U.S. gas, are trading below $1.80 per million British thermal unit (mmBtu), and earlier this year dropped to a 3-1/2-year low on warm weather and oversupply.
“We need gas prices to get to $2.50 for an overall increase in activity. The Permian customers that have associated gas are seeing awful differentials,” said Mark Marmo, CEO of oilfield firm Deep Well Services.
In West Texas producers are paying to have shippers to take their gas. Prices at the region’s Waha hub have been below zero in several trade sessions since March, a sign that supply is sharply outpacing demand and pipeline capacity.
Producers can respond by reducing their output or pay to keep pulling gas out of the ground.
“Constrained gas pipeline and gas processing plant capacity has acted as a choke point on oil production in parts the Permian Basin,” said Tim Roberson, president of Permian producer Texas Standard Oil.
“If oil prices are high enough, the gas price becomes less of a consideration in the overall drilling economics,” he added.
RIGS PLATEAU
U.S. oil production is expected to grow by 260,000 barrels per day (bpd) this year, to a record 13.19 million bpd, but far behind the over 1 million bpd of growth it saw between 2022 and 2023, according to the U.S. Energy Information Administration.
U.S. shale production has persistently exceeded recent estimates, but market analysts have not been tempted to raise their growth forecasts in response to higher prices.
Energy tech firm Enverus, this week said it sees U.S. production rising 255,000 bpd this year.
“Rig activity levels continue to plateau suggesting that these price levels have not generated an activity response,” said Alex Ljubojevic, an analyst with Enverus.
The U.S. oil drilling rig count last week was at 508, down 82 from year-ago levels, while the number of active gas rigs was at 110, its lowest since January 2022, according to data from Baker Hughes.
Less access to financing and investor pressures to deliver higher returns also are restraining oil production expansions, said Brad James, CEO of contract driller Enterprise Offshore Drilling.
Potential fees on producers for methane releases above certain thresholds are being watched closely by producers as another cost. The fees would start this year at $900 per metric ton and rise to $1,500 per ton in 2026.
“The methane detection enforcement procedures for small producers is a looming crisis,” one energy executive told a Dallas Fed survey last month.
In all, 80% of the 129 executives surveyed by the Dallas Fed said the methane fee was slightly or significantly negative to their business.
“Access to capital is limited because of ESG (environmental, social and governance), politics, energy transition, bias against fossil fuels,” James added. “The result of diminished access to capital is that our clients exhibit much more capital discipline than they did in years past.”
Investing.com – With another day of gains in and futures, the Swiss group Julius Baer has decided to change its outlook on commodities to constructive. The group now believes that both metals have the potential for further increases, as stated in a note sent to clients and the market on Friday morning.
The group mentioned that, in addition to U.S. monetary policy, the gold market is still dominated by Asia. “We have to recognize that the region’s willingness to pay for gold as a hedge against economic and geopolitical risks appears even greater than we expected,” said Carsten Menke, head of next-generation research at Julius Baer.
Weaker-than-expected U.S. economic data have revived hopes for interest rate cuts by the Federal Reserve (Fed, the U.S. central bank), boosting gold and silver prices. This could “be the missing incentive for safe-haven seekers in the Western world to return to the markets,” he added.
Central Bank Purchases in Focus
Central banks have been buying gold more for geopolitical reasons than economic ones, according to Julius Baer. In China, for example, there is a desire to reduce dependence on the U.S. dollar – important for avoiding potential sanctions.
The People’s Bank of China is believed to be responsible for at least 30% to 50% of all central bank purchases over the past two years. Although it shows signs of being price-sensitive, “its willingness to pay has increased as gold prices rise,” notes Julius Baer. It is expected that other monetary authorities will follow the same steps, moving away from the U.S. dollar.
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Over the past three weeks, US prices have surged 30% to above $2.50 per million British thermal units (mm/BTU), fueled by production declines and increased feedgas demand for liquified natural gas (LNG) exports.
Moreover, recent producer cuts, maintenance events, and Freeport LNG’s normalization of gas demand post-outage have contributed to this rise. Cheniere’s announcement of no heavy maintenance for its liquefaction trains this year also supports higher prices.
In a Thursday note, Goldman Sachs strategists said the return of gas prices above $2/mmBtu aligns with their expectations, as production curtailments “would ultimately lead to lower storage congestion risks for this summer.”
“That said, we see only limited further upside from current levels, with stronger gas prices risking a return of congestion concerns,” they added.
Goldman notes that prices above $2/mmBtu reduce gas competitiveness compared to coal, with a $0.50/mmBtu increase potentially cutting gas demand by 1 billion cubic feet per day (Bcf/d), especially in shoulder months.
Moreover, higher prices may prompt the restart of previously shut-in wells. EQT (ST:), the largest producer in the Appalachia region, indicated it would resume production if prices sustainably exceed $1.50/mmBtu. And while Appalachia prices haven’t risen as much as NYMEX, the local hub has averaged $1.44/mmBtu month-to-date, up 10¢ from last month, strategists highlighted.
Elsewhere, European gas prices have also risen this summer, though less sharply than in the US.
Title Transfer Facility (TTF) prices increased 18% over the past three months to around 30 euros per megawatt-hour (MWh), holding steady in May.
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However, unlike the US market, this rally lacks fundamental support, with Northwest (NW) European gas storage at record-high levels, Goldman strategists pointed out.
“To be sure, NW European LNG imports have remained weak relative to last year – and are likely to get weaker in the coming weeks owing to a seasonal decline in global LNG production, exacerbated by outages at Australia’s Gorgon export project,” they said.
“Going forward, we expect healthy non-European demand for LNG to continue to incentivize a decline in European LNG imports vs last year,” they continued.
Investing.com– Gold prices fell slightly on Friday, trimming some of their gains for the week as comments from a slew of Federal Reserve officials offered a more sobering outlook on interest rate cuts.
The yellow metal had risen to nearly $2,400 an ounce this week in the immediate aftermath of some soft U.S. economic readings. But it pulled back from these levels on Thursday and Friday.
steadied at $2,377.40 an ounce, while expiring in June fell slightly to $2,381.10 an ounce by 00:19 ET (04:19 GMT).
Gold retreats as Fed officials downplay rate cuts, but weekly gains due
The yellow metal fell on Thursday after a string of Fed officials cautioned against bets on immediate reductions in interest rates.
Several members of the central bank’s rate setting committee said the central bank will need much more convincing that inflation was coming down beyond a marginally soft inflation reading for April.
This saw traders begin pricing out some expectations for a rate cut in September. The and also rebounded from earlier losses this week.
Still, some softer-than-expected readings put gold on course for a 0.7% weekly gain.
The yellow metal was also in sight of a record high of above $2,430 an ounce, although it appeared unlikely the level would be met in the near-term.
Other precious metals retreated on Friday, but were set for bumper weekly gains. fell 0.2% but were trading up 6.2% for the week, while fell 0.4% but were up 4.5% this week.
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Copper mixed amid middling China cues
Among industrial metals, one-month copper futures tumbled from two-year highs tracking middling economic data. But three-month copper futures pushed higher and were set for a stellar week as markets bet on tighter supplies and an eventual demand recovery in the coming months.
on the London Metal Exchange rose 0.6% to $10,445.0 a ton, while rose 0.3% to $4.8935 a pound.
Data from China on Friday painted a mixed picture of the economy. While grew more than expected, growth slowed and shrank at an accelerated pace. Growth in Chinese also slowed.
The readings presented a muddled outlook for the world’s biggest copper importer, as it rolled out more stimulus measures to shore up growth.
Three-month copper futures gained on the prospect of a demand recovery, and were up nearly 4% this week. They were also at two-year highs.
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