Brent breaks $45 level
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Prices jump on July inventory draw; Continental to restore shut in production
Brent oil closed above $45 per barrel Aug. 5 for the first time since the coronavirus pandemic staggered markets in early spring. Prices jumped on news from the Energy Information Administration that crude oil inventories fell by 7.4 million barrels during the week ending July 31.
The American Petroleum Institute also reported an inventory draw - of 8.587 million barrels - for the last week of July.
A week earlier, the EIA said inventories were down 10.6 million barrels, after a build of 4.6 million barrels in the second week of July.
Prices began to move upward on Aug. 4 as Brent rose 28 cents to the $44.43 level.
In recent days, Alaska North Slope crude has lagged Brent. On Aug. 4 ANS rose 59 cents to $42.74. On Aug. 5, ANS crude reached $43.49, an increase of 75 cents.
Gains may fadeWhile the inventory draws have been bullish for prices, the partial return of curtailed OPEC+ oil production beginning in August is likely to moderate upward price action over the next few months.
However 2020 may turn out to be a better year than originally expected by oil price prognosticators.
A Reuters survey of 43 analysts and economists released July 31 forecast Brent crude to average $41.50 per barrel in 2020, up from a $40.41 consensus in its June survey. Brent is expected to average $49.85 in 2021.
On the demand side, the poll projected a contraction of between 7.2 million and 8.5 million barrels per day for the full-year 2020.
Oil is “caught-up in a step-wise rebalancing process,” said Harry Tchilinguirian, head of commodity research at bank BNP Paribas. “It’s in demand recovery where the uncertainty lies, with COVID-related developments generating concerns that the pace of reopening may be impeded.”
If the COVID-19 situation improves, demand will improve, and so will prices.
“A breakthrough of the $40 to $45 range is possible if the comeback of the global economy will be faster and stronger than expected,” LBBW analyst Frank Schallenberger said.
A Rystad report released July 28 predicted that demand will exceed supply in December, despite recent COVID-19 spikes and the OPEC+ production increases.
But the report (covered in Petroleum News last week), anticipated a 170 million-barrel supply glut due to OPEC+ production activity before supply and demand balance at the end of the year.
If the Rystad projections play out, the stage will be set for higher prices in 2021, as predicted by the Reuters poll.
Explosion roils oil marketsOil trading saw a spike in volatility Aug. 4 as a massive explosion at Lebanon’s main port in its capital Beirut was at first feared to have been an attack.
President Donald Trump said Aug. 4 that the explosion was a “terrible attack” which American generals told him it was likely caused by a bomb.
“They seem to think it was an attack,” Trump said. “It was a bomb of some kind, yes.”
By the following day, it was understood to have been an unfortunate industrial accident due to ignition of an estimated 2,750 metric tons of explosive ammonium nitrate stored at a warehouse, possibly involving fireworks as well.
More than 135 people were killed and 5,000 wounded in the explosion, according to the Red Cross.
While a conflagration in the Middle East could rapidly escalate oil prices, the Lebanon event is not seen to have a lasting impact on oil prices. Trading on Aug. 4 settled down with benchmark prices ending slightly higher across the board.
Continental increases productionContinental Resources Inc. sees higher prices coming, and the company is increasing production after shutting in 70% of its production in May and June due to the COVID-19 pandemic.
“We expect third quarter production to range between 280,000 and 300,000 boe per day,” CEO William B. Berry said in a Aug. 3 conference call. “Consequently, production will increase in the second half of 2020, and we expect to exit the year at 310,000 to 330,000 boe per day.”
Berry said the company’s actual July volumes will be in line with previous guidance of about 225,000 to 250,000 boe per day.
“As we look forward, there are a number of factors positioning us for a strong second half of 2020 and beyond,” he said.
“We’re bringing back essentially all our oil production in August,” Berry said. “So we’re up and running all the production that we had shut-in.”
The company said the return of prices to the $40 level spurred the increased production, along with the expectation of higher pricing in the future.
“$40 a barrel, we don’t believe that’s going to be here long term,” Executive Chairman Harold G. Hamm said. “Just that’s not going to be sufficient to hold production levels in the U.S. and the world, so we think that’s a very short-term situation anyway.”