Omicron roars in!
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New variant clobbers prices ahead of OPEC+ output increase considerations
Alaska North Slope crude fell 90 cents Dec. 1 to close at $70.02 per barrel, while West Texas Intermediate lost 61 cents to close at $65.57, and Brent dropped $1.70 to close at $68.87.
The losses on the day were negligible compared to those on the previous three trading days following Thanksgiving on Nov. 25.
On Nov. 24 ANS and Brent closed over $80, at $82.37 and $82.25 respectively, while WTI closed at $78.39.
On Nov. 26, global oil prices plunged by more than 10% on the announcement of a new COVID-19 variant - B.1.1.529 - showing up in several African countries. It was the largest daily loss since April 2020.
The variant, dubbed omicron, reportedly has an unusual slate of mutations which may help it evade the body’s immune response and make it more transmissible. Some countries blocked travelers from countries where omicron has been seen, and a fear of lower mobility and new lockdowns hammered oil while sparking a selloff in financial markets.
Monday Nov. 29, ANS closed at $74.41, WTI closed at $69.95, and Brent closed at $69.95.
The red ink continued Nov. 30 after Federal Reserve Chair Jerome Powell said the red-hot U.S. economy may cause the central bank to end asset purchases sooner than previously thought in 2022. ANS slid $3.49 to close at $70.93, WTI dropped $3.77 to close at $66.18, and Brent lost $2.87 to close at $70.57.
Dec. 1 trading began with a rally but switched to a loss on the news that a case of the omicron variant had been reported in California.
OPEC+ to consider market balanceThe rise of omicron complicated matters as the Organization of the Petroleum Exporting Countries and its allied producing countries prepared to meet Dec. 2 to consider whether to add a planned 400,000 barrels per day of production in January.
“The sudden appearance of a potentially new and more dangerous variant comes on top of new lockdowns in parts of Europe aimed at reversing a dramatic infection surge, especially in unvaccinated populations,” Angola Minister of Mineral Resources and Petroleum Dr. Diamantino Pedro Azevedo said in opening remarks to the 182nd meeting of the OPEC Conference Dec. 1. “On another front, the planned release of oil from a number of strategic reserves reinforces to the necessity of diligent market monitoring to avoid a return to market imbalance.”
Azevedo said OPEC needs to pay close attention to downside risks associated with inflation, rising debt levels and supply chain disruptions, while remaining prepared to be proactive as market conditions warrant.
US shale CAPEX to jump in 2022U.S. shale upstream expenditure is projected to increase 19.4% in 2022, from an expected $69.8 billion in 2021 to $83.4 billion, the highest spending level since the onset of the COVID-19 pandemic, according to a Dec. 1 Rystad Energy report.
Rystad said its estimated year-on-year increase calls for price inflation of $9.2 billion with increased activity of $8.6 billion, adding that the increases will be partially offset by $4.2 billion in savings from efficiency gains.
Efficiency gains will be driven predominantly by further adoption of simul-fracs, the consultancy said.
“Oil and gas activity and upstream spending in U.S. land has been exposed to significant volatility in the last two years,” said Artem Abramov, Rystad head of shale research. “Aggressive strategies from private operators in the U.S. shale patch have driven spending this year, but we anticipate significant growth in 2022 from public and private operators alike.”
Despite the spending growth, the 2022 total is well below the level forecast for 2022 before the pandemic took hold.
In November 2019, Rystad forecast total U.S. shale spending for 2020 would be $104.9 billion, with $109.7 billion and $119.8 billion per annum estimated for 2021 and 2022, respectively.
Rystad’s estimate for 2020 was cut in that year’s second quarter to $60.4 billion following the unprecedented oil price crash and a domestic storage crisis.
Public independents maintained their 2021 U.S. shale budgets compared with 2020 on a full-year basis, with a modest increase in the weighted-average well activity index - two-thirds of completion count and one-third of drilled well count, Rystad said.
Higher activity was offset by structural efficiency gains and lower service costs behind actual drilling and completion operations, Rystad said, noting that while the statement “might sound counterintuitive from the perspective of significant spot rate inflation in most service segments throughout 2021, it should be noted that there was an opposite trend throughout 2020, which allowed large independents to lock in cheaper service rates in early 2021 compared to what was behind their D&C spending in 2020.”
Private operators, moving aggressively throughout 2021, heated up spot service rates and have felt the impact of cost inflation this year, Rystad said. Expanding private E&P activity drove total U.S. shale capital expenditure up by around 16% in 2021 compared with 2020.
A new pandemic-fueled hit to demand, however, could put the brakes on 2022 CAPEX.
“As the Omicron variant of the novel coronavirus tightens travel restrictions and raises concerns over a potential industry slowdown, some hesitancy in spending could yet materialize,” Rystad said.