This week, we reached some milestones in the recovery over the year from the oil demand crisis 2020. West Texas Intermediate, (WTI) has reached and exceeded the $ 55.00 level, and Brent has approached $ 60. These are some important psychological barriers to the market and, if sustained, as we hope, will push prices to up.
What happened?
API announced a significant draw of ~ 4.3 million barrels in oil stocks yesterday, when a modest increase was expected. Lower movements in gasoline and distillate stocks reinforced this price movement, since it suggested that refineries were producing products to meet current and expected demand.
In the past few weeks, oil prices have been resistant to adverse data (increased stock of raw and refined products) and have continued to rise slowly. The market’s easing with demand confirmation pushed WTI prices to that critical $ 55.00 limit.
If the EIA confirms this move today (these reports are sometimes contradictory), we expect another higher boost for both crude oil, WTI and Brent. Especially if the confirmation is of significant proportions, such as 8 to 10 mm barrels. Continued advances in oil prices will soon reverse the slowdown we have seen in the oil stock market. Oil stock prices are typically below 15-20% of recent highs in an apparent disconnect from the recent strength of the underlying oil data.
Oil stocks are falling in the 5-year range
Last week ~9.9 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 oil prices, as the market will now begin to shift its concern from pending stocks to concern with secure supply. I discussed this in detail in a OilPrice Article last month.
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The EIA also noted an increase in refinery income for the previous week, which is not something you expect at this time of year. That said, we still have less 2mm BOPD from a year ago. This increase is optimistic for prices, as it implies an increase in retail demand.
EIA-WPSR
US production is starting to fall
Crude oil production thanks to the withdrawal of Drilled but Uncompleted (DUC) levitated about 11.0 mm BOEPD last month or so. This, despite the level of new drilling, (although on the rise), is not yet at a level that will fully offset the decline rates of the field, (6-40% per year). Domestic crude oil production fell 2.3 mm in the BOEPD from its historical maximum established in March 2020, at 13.1 mm in the BOEPD.
This week, the EIA reported a modest decline from 100K BOEPD to 10.9 mm BOEPD. Occurring in the lower 48th, as noted by the EIA report, it is no exaggeration to link this decline to the drop in shale production. We will have an additional guide when the EIA publishes its Drilling Productivity Report (DPR), the next iteration of which will be on February 16º. Last month’s report predicts a decline of ~ 89K BOEPD shale fields in February.
Looking at the rest of 2021
The main indicators are in place for a continuous increase in oil prices, as we have seen so far. One of the issues that we have to resolve now is what we can expect in terms of prices and how quickly this can happen.
Goldman Sachs, (NYSE: GS), recently asked $ 65 Brent in mid-year. With the narrow spread ($ 2-3.00) between Brent and WTI recently, this would put WTI in the $ 60 range. Goldman’s global head of commodities research, Jeffrey Currie, said in a note that accompanied the report-
“With vaccines being launched around the world, the likelihood of a quick squeeze market starting in 2Q 2021 is increasing, as the recovery in demand stresses the ability of producers to restart production.”
The advent of this report moves Goldman’s forecast to reach the $ 65.00 level in about months. With the conservative tone of Goldman’s previous reports, this is likely to go on the conservative side as well, meaning that the middle of the year provides them with some protection for the relevant forces to act. The main relevant external force is the launch of the Covid vaccine and new infections and hospitalization rates that continue to decline.
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My expectation is that, even with the increase in drilling and fracking taking place, 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 can dampen increase.
Main countervailing forces that can dampen market enthusiasm
The Saudis have given the oil market a gift in early January, with the announcement that retain another 1 mm BOPD from the market. As prices rise, there will be internal and external pressure from OPEC + to start restoring production. This is built-in, however, which means that this masterstroke that turned an oil market already on the rise, so to speak, would always be a transition movement.
Bloomberg
Thus, with the increase in oil prices, the chances that the Saudis and OPEC + will stop supporting prices with restricted production to protect their market share from competitors.
This movement that we anticipate is not far off in the future, it will act to slow down stock decreases, which will prevent prices from rising too quickly in the near future.
Moving on, we have China, which almost alone supported oil prices with its massive purchases last year. Estimates vary but China’s purchase of cheap oil last year could give them a ~ 300 mm bbl mattress to turn to if prices rise too quickly.
Finally, there is an expectation that Iran will enter into some sort of agreement with the new US political regime to restore total production. There is no sign from the Biden government about how urgent it is to come to an accommodation with Iran on its agenda. Said that, re-entry into nuclear deal with Iran it was a campaign bullet, so some relief is on the horizon for them.
Your takeaway
There are more upside forces at play than downside in my estimation, and the higher momentum for oil should continue. The key points that support this containment are the drops in storage that we document here and the current roll in the new production to less than 11.0 mm BOEPD. If these rates continue, as we hope, thanks to a recovery led by declines in Covid’s new infection rates, crude oil will have no alternative to rising as the year progresses. By David Messler for Oilprice.com
