Global Delta cases puts pressure on oil despite US bull run

US oil looks like it’s in great shape, but pressure is being put on prices by rising Covid-19 Delta variant cases worldwide.

Oil trading

EIA storage data records another successive drawdown in its latest report. For the week ending July 23rd, crude inventories dropped by 4.1m on a week-by-week basis. That puts them roughly 7% below the five-year average for this time of year. 

We can see US oil stocks continue to drop, which signposts strong demand recovery. Gasoline stocks, which dropped by 2.3m barrels, smashed estimates of a 916,000 drop, fitting this narrative.  

The bullish signs for US oil continue. Stocks at the Cushing, Oklahoma hub were seen at 36.299m barrels on Tuesday 27th – down 360,917 from the previous week’s volumes.  

Turning to oil prices, Brent and WTI pulled back slightly from their weekend levels to trade at $73.24 and $74.78 respectively on Monday afternoon. 

The markets thought support could have come from the bullish state of US oil inventories, as well as developments in the Iran nuclear deal.

Traders were bracing for an Iranian crude glut, should the deal be successfully concluded soon, but it appears that a new deal may be off the cards completely. Good news for the tricky global supply balance. 

As of Tuesday morning, however, oil had slid back further. WTI was now at around $71.80, with Brent averaging around $73.40.

It appears oil prices may still run into resistance via slowing manufacturing in key economies. Both China and the UK reported drops in factory output in July, for example. 

The big issue here is the Delta variant of Covid-19. Rising cases in China, the US, and in fact the world at large, has the market worrying about the demand recovery implications. Should the world enter a new lockdown phase, travel and manufacturing will likely drop off again. If that is the case, oil demand may fall as well.

It’s a tricky situation. All we can do is hope more people are vaccinated and that those vaccines prove resistant to the Delta variant.

Elsewhere, OPEC+ increased output by 610,000bpd barrels per day in July, reaching its highest levels since April 2020. Saudi Arabia, predictably, led the cartel in terms of output spikes, increasing its outward flows by 460,000bpd.  

Oversupply could lead to bearish sentiment, counteracting US oil’s bull run. 

Natural gas trading

Natural gas dropped back from its recent highs on Monday but was still trading above the $4.00 mark. 

Where next all depends on the weather. Natural Gas Weather forecasts mild demand, although markets will be looking for heatwaves in Europe and the US for strong cooling gas consumption to support prices. 

Per Natural Gas Weather’s US outlook: “National demand will ease to lighter levels this week as weather systems sweep across the eastern ½ of the US w/showers, thunderstorms, and highs of only 70s to lower 80s. The West into Texas and the Plains will be very warm to hot with highs of upper 80s to 100s as strong upper high-pressure rules.  

“Temperatures will increase across the South and East late next weekend with highs warming into the mid-80s to lower 90s. Overall, MODERATE national demand this week, then increasing to HIGH late next weekend.” 

Looking at storage, the EIA reports working gas inventories totalled 2,714 Bcf on the week ending July 23rd. Stocks were 523 Bcf lower than this time last year.  

US LNG production appears to be relatively strong at 91.5 Bcf per week, but lower than the 93 Bcf estimated required to keep pace with global demand. Feed gas at key US infrastructure is cutting close to 11 Bcf across the week.