This week we have reached several stages in the recovery of a year since the collapse of oil demand. since 2020. West Texas Intermediate (WTI) hit and crossed the $ 55.00 level, and Brent approached $ 60. These are some important psychological barriers to the market and, if sustained, as we expect them to be, prices will rise.
What happened?
API announced yesterday a significant extraction of barrels of ~ 4.3 mm in crude oil stocks, when a modest construction was expected. Smaller movements in petrol and distillate stocks supported this price movement, as it suggested that refineries were discarding the product to meet current and anticipated demand.
In recent weeks, oil prices have been resistant to negative data (stocks of crude and refined products) and have continued to rise slightly more. The easing of the market to this confirmation of demand pushed prices for WTI through the critical threshold of 55.00 USD.
If the EIA confirms this move today (these reports are sometimes contradictory), we expect a new higher push for both crude, WTI and Brent. Especially if the confirmation is of significant proportions, such as 8-10 mm barrels. The continuous progress of crude oil prices will soon reverse the slowness we have seen in the oil stock market. Oil prices are usually 15-20% higher than recent highs, in an apparent disconnect from the recent strength of basic oil data.
Crude oil stocks fall within 5 years
~ Since last week9.9 mm bbl draw moved the supply chart back to the 5-year average for the first time since mid-2020. This removes another psychological barrier to the continued rise in crude oil prices, as the market will now begin to shift its concern from stock depletion to concern with on secure supply. We discussed this in detail in a Article OilPrice last month.
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The EIA also noted an increase in refining capacity for the previous week, which you do not expect at this time of year. That being said, we are still out of the 2mm BOPD a year ago. This increase is optimistic for prices, as it implies an increase in demand at the retail level.
EIA-WPSR
American production is starting to decline
Crude oil production due to drilled but incomplete withdrawal (DUC) has levitated about 11.0 mm BOEPD in the last month or so. This, despite the level of new drilling, (although it is increasing), is not yet at a level that will fully compensate for the rates of decline in the field, (6-40% per year). Domestic crude oil production decreased by 2.3 mm BOEPD from the maximum value set in March 2020 to 13.1 mm BOEPD.
This week, the EIA reported a modest decline from 100K BOEPD to 10.9 mm BOEPD. Taking place in 48 years, as mentioned in the EIA report, there is no stretch to connect this decline to declining shale production. We will have additional guidance when the EIA publishes its Drilling Productivity Report (DPR), the next iteration of which will take place on 16 February.a. Last month’s report predicts a decline in shale fields of ~ 89K BOEPD in February.
Looking to the rest of 2021
The key indicators are in place for a continuous rise in oil prices, as we have noted so far. One of the questions we need to address now is what can we expect in terms of prices and how quickly could this happen?
Goldman Sachs, (NYSE: GS), recently applied $ 65 Brent by mid-year. With the narrow difference (2-3 USD) between Brent and WTI lately, this would put WTI at the lowest $ 60. Goldman’s global head of commodity research, Jeffrey Currie, said in a note accompanying the report –
“With the launch of vaccines worldwide, the likelihood of a rapid tightening market starting in 2Q 2021 is increasing, as a return to demand underscores producers’ ability to resume production.”
The release of this report moves Goldman’s forecast to reach the $ 65.00 level by about a month. With the conservative tone of previous Goldman reports, this is likely to be wrong on the conservative side as well, which means that in the middle of the year it gives them a certain cushion so that the relevant forces can play. The main relevant external force is the launch of the Covid vaccine and new infection and hospitalization rates continue to fall.
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My expectation is that even with the rise of drilling and fracking, we should not expect sustained prices of over $ 60 for the WTI ahead of the Goldman mid-year estimate, as there are bearish forces at play that could put a rising shock absorber.
The main compensatory forces that could diminish the enthusiasm of the market
The Saudis have given the oil market a gift in early January with the announcement that they will go note another 1 mm BOPD from the market. As prices rise, there will be internal and external pressure from OPEC + to start restoring production. However, this is ripe, which means that this major blow that has transformed an already growing oil market, so to speak, has always been a transitional movement.
Bloomberg
So as oil prices rise, the chances of Saudi and OPEC + shifting from low-priced support prices to protecting their market share from competitors increase.
This move, which we anticipate is not far off in the future, will act to slow down the decline in stocks, which will prevent prices from rising too much in the near future.
Going further, we have China, which almost alone supported oil prices with its massive purchases last year. Estimates vary but buying cheap crude oil last year can give them a ~ 300mm bbl pillow to draw on if prices rise too fast.
Finally, Iran is expected to conclude some sort of agreement with the new US political regime to restore full production. There are no signals from the Biden administration as to how pressing it is to come to an accommodation with Iran on their agenda. That being said, re-entry into the nuclear deal with Iran it was a campaign bullet, so a relief is on the horizon for them.
Your takewayway
In my opinion, there are more bullish forces than bearish, and the greater momentum for crude should continue. The key points supporting this dispute are the stock decreases we have documented here and the current update of new production to below 11.0 mm BOEPD. If they continue, as we expect them to be due to a recovery driven by declining new rates of Covid infection, crude oil has no choice but to go further as the year progresses. By David Messler for Oilprice.com
