This week we reached some milestones in the year-long recovery from the oil demand crash of 2020. West Texas Intermediate (WTI) hit and moved past the $ 55.00 level, and Brent moved closer to $ 60. These are some major psychological barriers to the market, and if sustained, we will push prices higher, as we expect.
What happened?
The API yesterday announced a significant drawdown of ~ 4.3 mm barrels in raw stocks when a modest build was expected. If the petrol and distillate stocks move lower, it has intensified the price movement, as it indicates that refineries are lowering the product to meet current and expected demand.
Over the past few weeks, oil prices have been resistant to unfavorable data (stockpiling of crude and refined products) and have continued to rise. The easing of the market with this confirmation of demand has driven prices for WTI through the critical threshold of $ 55.00.
If the EIA confirms this move today (these reports are sometimes contradictory), we expect another push higher for both ru, WTI and Brent. Especially if the fastening is of large dimensions, such as 8-10 mm barrels. Continued price increases in crude oil will soon reverse the sluggishness in the oil stock market. The price of oil shares is usually 15-20% lower than the recent highs as it seems to have broken the recent strength in the underlying data regarding oil.
Crude shares fall within the five-year range
Last week’s ~9.9 mm bbl draw for the first time since mid-2020, the supply graph has slipped back into the five-year average. This removes another psychological obstacle to the continued rise in crude prices, as the market will now begin to shift its concerns from overhanging stocks to concerns about safe stocks. I discussed this in detail in a OilPrice Article last month.
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The EIA also has an increase in refinery throughput for the previous week, which you do not expect this time of year. That said, we are still about 2mm BOPD from a year ago. This increase is positive for prices because it implies an increasing demand at retail level.
OIB-WPSR
US production begins to decline
Crude oil production due to brushed but unfinished (DUCs) extraction has raised about 11.0 mm of BOEPD over the past month or so. This is despite the level of new drilling (although increasing) still not at a level that will totally compensate the decline rates (6-40% per annum). Domestic rough production is 2.3 mm less than the BOEPD from its everyday high in March 2020, at 13.1 mm BOEPD.
This week, the EIA reported a modest drop from 100K BOEPD to 10.9 mm BOEPD. As in the EIB report in the lower 48, it is not a measure to link this decline to declining shale production. We will have an additional guideline when the EIA publishes its Drilling Productivity Report (DPR), the next iteration of which will appear on 16 February.de. Last month’s report predicts a decline from shale fields of ~ 89K BOEPD in February.
Look forward to the rest of 2021
The key indicators are available for a continued 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 pricing, and how fast can it happen?
Goldman Sachs (NYSE: GS) recently asked $ 65 Brent by mid-year. With the close spread ($ 2-3.00) between Brent and WTI in recent times, this would put WTI in the low $ 60s. Goldman’s global head of commodity research, Jeffrey Currie, said in a note accompanying the report-
“With the introduction of vaccines around the world, the likelihood of a rapidly tightening market will increase from 2Q 2021 as the recovery in demand emphasizes the ability of producers to start production.
The advent of this report shifts Goldman’s forecast for reaching the $ 65.00 level by about months. With the conservative tone of previous Goldman reports, it’s likely to err on the conservative side as well, meaning the middle of the year offers a bit of a cushion for the forces involved to play. The main external force is the introduction of the Covid vaccine and the new infection and hospitalization figures that are still declining.
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My expectation is that even with the increase in drilling and fracturing, we should not expect a sustained price of more than $ 60 for WTI before Goldman’s mid-year forecast, because there are also strong forces that dampen can rise.
Important compensatory forces that can dampen the enthusiasm of the market
The Saudis give the oil market a gift in early January with the announcement that they are going withhold another 1 mm BOPD from the market. As prices rise, there will be internal and external pressure from OPEC + to start restoring production. However, it is baked in, which means that this masterpiece that has turned an already rising oil market on its ear would almost always be a transitional movement.
Bloomberg
So with rising oil prices, the chances increase that the Saudis and OPEC + will move from supporting prices with limited production to protecting their market share from competitors.
The move we expect is not far in the future, and will lead to a slowdown in inventory declines, which will prevent prices from rising too sharply in the near future.
As we move forward, we have China supporting oil prices almost single-handedly with its massive purchases last year. Estimates vary but buying cheap crude oil in China last year could give them a cushion of ~ 300mm per square foot to pull if prices rise too fast.
Finally, there is an expectation that Iran will cut a deal with the new political regime in the US to restore full production. There is no signal from Biden’s government about the urgency of staying in Iran. That said, rejoins the nuclear deal in Iran was a campaign bullet, so there is some relief on the horizon for them.
Your takeaway
There are, in my opinion, more bullish forces than bearish, and the rise higher for crude oil should continue. The key points supporting this fight are the decrease in storage we have documented here, and the current turnover in new production to below 11.0 mm BOEPD. If it continues, as we expect, thanks to a recovery led by declining new Covid infection rates, crude oil may have no alternative to getting higher as the year progresses. By David Messler for Oilprice.com
