This week, we hit some milestones in a year’s recovery from the oil demand crash of 2020. West Texas Intermediate, (WTI) hit and passed the $ 55.00 level, and Brent moved closer to $ 60. These are some major psychological barriers to the market, and if they persist, as we expect prices are rising.
What happened?
The API yesterday announced a significant decrease of ~ 4.3mm barrels of crude inventories while a modest build was expected. Reductions in gasoline and distillate stocks supported this price movement as it suggested that refineries were releasing their products to meet current and projected demand.
In recent weeks, oil prices have been resistant to adverse data (stock build-up of crude and refined products) and have continued to rise. The market’s relief at this confirmation of demand pushed prices for WTI through that critical $ 55.00 threshold.
If the EIA confirms this move today (these reports are sometimes conflicting), we expect one more push higher for crude oil as well as WTI and Brent. Especially if the fastening is of significant proportions, such as 8-10 mm barrels. Continued price increases for crude oil will soon reverse the sluggishness we’ve seen in the oil stock market. Oil stock prices have typically fallen 15-20% from recent highs, in an apparent decoupling from recent strength in the underlying oil data.
Crude shares are in the 5 year range
Last week ~9.9mm bbl draw the supply chart shifted back to the five-year average for the first time since mid-2020. This removes another psychological barrier to the ongoing rise in crude oil prices, as the market will now shift its concerns from overhanging stocks to concerns about safe supplies. I have discussed this in detail in one OilPrice article last month.
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The EIA also noted an increase in processing capacity of the refinery for the previous week, which you don’t expect this time of the year. That said, we’re still about 2mm of BOPD from a year ago. This increase is optimistic for prices as it implies increasing demand at the retail level.
EIA-WPSR
US production is starting to decline
Crude oil production thanks to Drilled but Uncompleted (DUC’s) withdrawal has risen around 11.0 mm BOEPD in the past month. This, despite the level of new drilling (although on the rise), is still not at a level that will fully offset the decline of the fields (6-40% per year). Domestic crude oil production is down 2.3mm BOEPD from its all-time high in March 2020, at 13.1mm BOEPD.
This week, the EIA reported a modest drop from 100K BOEPD to 10.9mm BOEPD. Happening in the bottom 48, as noted in the EIA report, it is not difficult to relate this decline to declining shale production. We will have an additional guide when the EIA publishes its Drilling Productivity Report (DPR), the next iteration of which should be expected on Feb. 16.th. Report from last month predict a decline in shale fields of ~ 89K BOEPD in February.
Outlook for the rest of 2021
The main indicators are there for a sustained rise in oil prices, as we have noted so far. One of the questions we need to address now is what to expect in terms of pricing, and how soon can this happen?
Goldman Sachs, (NYSE: GS), has recently pushed for $ 65 Brent Mid-Year. With the narrow spread ($ 2-3.00) between Brent and WTI in recent times, this would put WTI in the low $ 60. Goldman’s global head of commodities research, Jeffrey Currie, said in a note accompanying the report:
“With vaccines being rolled out around the world, the likelihood of a rapidly tight market increases from the second quarter of 2021 as the revival in demand highlights the ability of producers to restart production.”
With the advent of this report, Goldman’s forecast for reaching the USD 65.00 level shifts by about months. With the conservative tone of previous Goldman reports, it’s likely that this is a mistake on the Conservative side as well, meaning they have a buffer for the relevant forces to play out by mid-year. The main relevant external force is the rollout of the Covid vaccine and the number of new infections and hospitalizations continues to decline.
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My expectation is that, even with the increase in drilling and fracking, we should not expect sustained prices above $ 60 for WTI before Goldman’s mid-year estimate as there are also bearish forces at play that could dampen the rise.
Important counterforces that can dampen the enthusiasm of the market
The Saudis gave the oil market one gift in early January with the announcement that they would do so withhold another 1-mm BOPD from the market. As prices rise, there will be internal and external pressure from OPEC + to restore production. However, this is ingrained, meaning that this masterful blow that spun an already rising oil market on its ear would, so to speak, always be a transitional move.
Bloomberg
So with rising oil prices, there is a greater likelihood that the Saudis and OPEC + will switch from supporting prices with limited production to protecting their market share from competitors.
The move we expect is not far in the future, will slow down stock declines, so prices will not rise too sharply in the near future.
Ahead we have China, which almost only supported oil prices last year with its massive purchases. Estimates vary but China’s purchase of cheap crude oil last year could give them a buffer of about 300mm bbl to draw on if prices rise too quickly.
Finally, Iran is expected to make some sort of deal with the new political regime in the US to restore full production. There are no signs from the Biden administration as to how urgent it is to get an accommodation with Iran on their agenda. That being said, re-join the nuclear deal with Iran was a campaign bullet, so there’s some relief on the horizon for them.
Your takeaway
There are more bullish forces at play than bearish in my opinion, and the push higher for crude oil should continue. The main points supporting this claim are the declines in storage we’ve documented here, and the current roll-over in new production to below 11.0 mm BOEPD. If those continue, as we expect, thanks to a recovery led by a drop in new Covid infections, crude oil will have no alternative to moving higher as the year goes on. By David Messler for Oilprice.com
