By David Messler – February 3, 2021 at 7:00 p.m. CST
Introduction
This week we have reached some milestones in the recovery of a year after the fall in oil demand of 2020. West Texas Intermediate, (WTI), surpassed the $ 55.00 level and Brent approached $ 60. These are some important psychological barriers to the market and, if they are maintained, as we expect, prices will rise.
What happened?
The API announced yesterday a major extraction of ~ 4.3 mm barrels in crude stock, when modest construction was expected. Lower movements in gasoline and distillates reinforced this price movement, as it suggested that refineries were withdrawing the product to meet current and anticipated demand.
In recent weeks, oil prices had been resistant to adverse data (inventory accumulations of crude and refined products) and had continued to rise. Relief from the market in the face of this demand confirmation boosted WTI prices through this critical threshold of $ 55.00.
If the EIA confirms this move today (these reports are sometimes contradictory), we expect another higher momentum for the two crudes, WTI and Brent. Particularly if the confirmation has significant proportions, such as 8-10 mm barrels. Continued advances in crude oil prices will soon reverse the slowness we have seen in the oil equity market. Oil stock prices typically fall 15-20% from recent highs, in an apparent disconnect from the recent strength of the underlying oil data.
Crude oil stocks stand at five years
~ From last week9.9 mm drawing put the supply chart back on average for five years 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 change. their concern of excess inventory to worry about secure supplies. I commented on this in detail in one Oil price item last month.
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The EIA also noted an increase in refinery performance for the previous week, something you won’t expect at this time of year. That said, we are still out of 2mm BOPD a year ago. This increase is bullish for prices as it implies a growing demand for retail.
EIA-WPSR
American production is starting to fall
Crude oil production thanks to perforated but incomplete withdrawal (DUC) has raised around 11.0 mm of BOEPD over the last month or so. This, despite the level of new drilling, (although increasing), is not yet at a level that fully offsets the rates of decline in the field (6-40% per year). Domestic crude oil production has fallen by 2.3 mm BOEPD from its all-time high set in March 2020, at 13.1 mm BOEPD.
This week the EIA has reported a modest decline from 100,000 BOEPD to 10.9 mm BOEPD. Taking place at the bottom of 48 years, as the EIA report points out, it is no problem to relate this decline to the fall in shale production. We will have additional guidance when the EIA publishes its Drilling Productivity Report (DPR), the next iteration of which is due to be published on 16 February.th. Last month’s report predicts a decline in shale fields of ~ 89,000 BOEPD in February.
Looking ahead to the rest of 2021
There are key indicators for a continued rise in the price of oil, as we have observed so far. One of the questions we now need to address is what can we expect in terms of pricing and how fast can this happen?
Goldman Sachs, (NYSE: GS), has recently complained $ 65 Brent mid-year. With the narrow difference ($ 2-3.00) between Brent and WTI in recent times, this would put WTI at the $ 60 lows. Goldman’s global commodity research chief Jeffrey Currie said in a note accompanying the report:
“With the deployment of vaccines worldwide, the likelihood of a rapid hardening of the market from 2Q 2021 increases as the rise in demand emphasizes the ability of producers to restart production.”
The appearance of this report moves Goldman’s forecast to reach the $ 65.00 level in about a few months. With the conservative tone of previous Goldman reports, this is likely to go to the Conservative side as well, which means it will provide them with a pillow in the middle of the year so that the relevant forces can exert themselves. The main relevant external force is the deployment of the Covid vaccine and new rates of infection and hospitalization continue to decline.
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My expectation is that even with the increase in drilling and fracking, we shouldn’t expect sustained prices of more than $ 60 for WTI ahead of Goldman’s mid-year estimate, as there are also there are bearish forces at play that could put a damper on the rise.
Key compensatory forces that could diminish market enthusiasm
The Saudis gave the oil market one gift in early January with the announcement they were going there retain another 1 mm BOPD of the market. As prices rise, there will be internal and external pressure from OPEC + to begin restoring production. Still, what it means is that this masterstroke that became a growing oil market, so to speak, was always a transition step.
Bloomberg
Thus, with the rise in the price of oil, the chances increase that the Saudis and OPEC + will go from supporting prices with moderate production to protecting their market share from competitors.
This measure, which we anticipate will not be far off in the future, will act to curb the fall in inventory, which will prevent prices from rising too sharply in the near future.
Moving forward, we have China that almost alone supported oil prices with its massive purchases last year. Estimates vary but buying cheap crude from China last year could give them a ~ 300mm bbl cushion on which to turn if prices go up too quickly.
Finally, there is an expectation for Iran to cut some sort of deal under the new U.S. political regime to restore full production. There are no signs from the Biden administration as to the urgency of reaching accommodation with Iran. That said, re-entering Iran’s nuclear deal it was a campaign bullet, so there is some relief on the horizon.
Your takeaway
In my opinion, there are more bullish than bearish forces at play, and the higher push for crude should continue. The key points supporting this dispute are the storage declines we have documented here and the current renewal of new production at BOEPD less than 11.0 mm. If they continue, as we expect, thanks to a recovery caused by the decline in new rates of infection by Covid, crude has no alternative to increase as the year progresses. By David Messler for Oilprice.com
