Oil Price Rally Falters as US Shale Producers Weigh Reopening
Oil prices fell to around $40 per barrel in early trading on Wednesday after reports that American Petroleum Institute (API) statistics showed U.S. crude stocks had risen sharply—confounding analysts expectations.
Market prices for Brent and West Texas International (WTI) hit three-month highs on Monday—with WTI prices creeping briefly above the $40 mark after Brent fell to a 21-year record low of $16 per barrel and WTI future prices briefly turned negative in April.
The Organization of the Petroleum Exporting Countries plus Russia and others (OPEC+) crude producers group had agreed on Saturday to extend supply cuts of 9.7 million barrels per day (bpd) until the end of July. Subsequently, however, a trio of Middle-Eastern oil producers—Saudi Arabia, Kuwait, and the UAE—indicated that they would not be continuing supplemental cuts of approximately 1 million barrels per day.
Norwegian energy analyst Rystad Energy stated that if OPEC and allies refrain from production increases, the market could experience crude oil and condensate supply deficits as soon as the end of June that would continue through 2021—shoring up prices, drawing down brimming reserves and easing U.S. shale producers back into the market.
At the 11th OPEC and non-OPEC ministerial meeting held remotely on June 6, the participants reiterated that it was vital that all major producers remain fully committed to efforts aimed at balancing and stabilizing the market. This included continuing through July the production cuts agreed for May and June between OPEC members plus Russia, while ensuring that producers that had not complied fully with the cuts, such as Iraq and Nigeria, would balance out their surpluses with even deeper cuts later in the summer.
Overall, OPEC+ reported 85 percent compliance with the production cuts.
According to Rystad Energy, “the generous OPEC+ voluntary cuts into July will not only balance the Covid-19-hit global crude and condensate demand, but are deep enough to create a monthly deficit starting from June 2020 and continuing uninterrupted until at least the end of next year.”
The company believes that crude oversupply is a thing of the past “as long as OPEC+ compliance stays strong and the oil demand recovery trajectory isnt radically altered.”
Petroleum Association of Japan President Tsutomu Sugimori told Reuters on Monday that he expects oil to continue to trade above $40 per barrel—as long as sufficient economic activity resumes to stimulate demand. Sugimori said he expected supply and demand to move toward an equilibrium.
Responding to the OPEC+ extension announcement, Ann-Louise Hittle, vice president of macro oils at energy analysts Wood Mackenzie, said “The 9.7 million b/d production cuts were already working, extending them an extra month will tighten the market more quickly.”
Hittle says that global demand is also recovering, with figures for May and June reflecting the relaxation of lockdown restrictions around the world. “Wood Mackenzie already expected the supply and demand balance to tighten in the third quarter,” she said in a statement. “With the extension, this rebalancing will accelerate.”
Hittle expects global demand to surpass supply and draw-downs of storage capacity to occur in the third quarter, leading to increasing oil prices from the current $40 per barrel to the $45-$50 range, with Q3 demand 10 million b/d higher than in the second quarter.
US Shale Will Recover, But When?
According to the Baker Hughes rig count, the number of rotary oil rigs in operation across the United States fell by 17 to 284 in the week ending June 5—a fall of a whopping 691 from the same weekend last year.
In a report on shale shut-ins, S&P Global writes that although neither shutting down a well nor restarting production are technically difficult tasks, they are associated with costs. In addition, some of the tiny cracks in the fracked shale may have closed, meaning that some wells will require time and additional measures to return to their previous production volumes—if thats possible at all.
According to S&P, “Some producers anticipate bringing shut-in wells online again if West Texas Intermediate oil prices remain above $30 per barrel.” The company quotes Goldman Sachs analysis that shows how WTI prices can change producer behavior. From $30-$40 per barrel, well completions resume, while prices from $40 to $50 maintain production levels. Prices from $45 to $ 60 per barrel would signal a return to expanding production, which most analysts expect will occur first in the west-Texan Permian basin.
According to S&P, however, “Few people, if anyone, expect the end of the great shale shut-in to offset a dramatic decline in U.S. production this year and perhaps in the years following. Oilfield workers have been laid off en masse. More than half the countrys drilling rigs have been idled. Fracking fleets are being decimated.”
“We just tromped on the brake pedal with both feet and slowed down production dramatically, such that it looks like we are going to get through,” veteran oilman Kyle McGraw told S&P. “People shut in at much greater rates because of that fear, a month ago, when we had that negative $37 oil.”
“As fast as we jumped on the brake, how fast will we move our foot over to the gas pedal now?” McGraw asked. “Will we go to the gas pedal with both feet? I think not.”
Words of Caution
While global oil demand has experienced a recovery during May and June, much of that demand has been driven by China. While some analysts have assumed that increased Chinese demand has been an indicatoRead More – Source