ANS crude hits new high
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Growing demand meets tight supply in wake of freak midwestern freeze
For every action there is an equal and opposite reaction, so says Newton’s third law of motion. Newton’s law applies to a relationship between two objects, so perhaps it doesn’t directly apply to the complexities of oil markets.
Surging oil prices in early 2021 may not equal an exact match to the plunge in early 2020, but there’s no denying that the action so far in 2021 is opposite to that of the pandemic-induced crash of 2020.
Oil prices have already recovered beyond levels that many analysts predicted for summer - even for the end of the year.
Alaska North Slope crude ascended $1.97 to a new post-coronavirus-crash high of $66.29 per barrel Feb. 24. Brent rose $1.67 to $67.04 and West Texas Intermediate rose $1.55 to $63.22, each also at new highs since the crash in April 2020.
The three indexes dropped a bit on Feb. 19, cooling off to end a week that had had seen prices advance to post-crash highs in the wake of the Texas rolling blackouts.
When trading opened Feb. 22, traders had had a weekend to assess the extent of supply disruptions from the polar blast that slammed the central United States. Prices jumped sharply higher on the day. ANS popped $2.45 to close at $64.60, Brent gained $2.33 to close at $65.24, and WTI rose $2.25 to close at $61.49.
Feb. 23 was a day of consolidation; ANS gave up 28 cents, but Brent added 13 cents and WTI added 18 cents.
As COVID-19 cases fall and vaccines proliferate, the brisk oil price action is likely driven by the growing pull of demand, compounded by supply constrictions. On top of that, the U.S. dollar weakened Jan. 24, unleashing a trifecta of upward pressure on oil prices.
U.S. petroleum demand is recovering, as measured by total domestic petroleum deliveries of 19.7 million barrels per day in January - just 1.2% below demand for the same month in 2020, according to the latest monthly statistical report by the American Petroleum Institute.
US supply dropsMeanwhile, supply has taken a hit.
40 million barrels of February oil production, mostly Permian Basin oil, has been lost to the weather and 5% of wells that went offline may never come back, Ben Luckock, Trafigura Group co-head of oil trading said on Bloomberg Television Feb. 22, adding that refined products faced a similar lost output.
The market is likely underestimating the impact, he said.
“We have a strong market going into summer,” Luckock said. “We’re certainly very bullish most of the world is getting out of lockdowns this summer. So, this market has been given an impetus given the events in Texas.”
Goldman Sachs Group Inc. said it expects Brent to reach $75 per barrel as consumption continues to recover faster than supply.
Morgan Stanley also boosted its outlook, calling for perhaps the tightest quarter in oil markets since 2000.
The global trading arm of the government-controlled State Oil Company of Azerbaijan Republic, Socar Trading, anticipates oil will hit $80 per barrel in 2021.
“I will not be surprised if we see $80 a barrel in summer or before year-end and above $100 a barrel in the next 18 to 24 months,” Hayal Ahmadzada, Socar chief trading officer, told Bloomberg Feb. 22.
Ahmadzada said steel price spikes will hinder oil services contractors’ ability to build pipes, wells and other infrastructure needed to bring back production on time and on budget.
“We may see a shake-out in that industry, due to very high steel prices,” he said.
The Federal Reserve Bank of Dallas thinks that higher prices won’t immediately move the needle for U.S. oil production in 2021 as producers focus on cash flow and returning capital to shareholders to win back investors’ trust following the pandemic-related price crash.
Public companies are reluctant to increase drilling expenditures while the pandemic outcome remains uncertain, Dallas Fed economist Kunal Patel told the International Energy Forum Feb. 22.
At recent prices over $60 per barrel, U.S. oil producers can drill profitably but most will hold off committing capital to drilling until assured that the price rebound is sustainable, Patel said, adding that he and his colleagues expect 2021 U.S. production will be “roughly flat” with 2020 levels - around 11 million bpd.
March 4 meetingThe Organization of the Petroleum Exporting Countries and its affiliated producing countries will hold the OPEC and non-OPEC Ministerial Meeting March 4 by teleconference to decide whether to restore 500,000 bpd of the 7 million bpd of oil production the group is currently withholding from the market.
OPEC+ had agreed on a schedule to gradually restore production in 2021, but it dialed back the scheduled increase in January as new lockdowns threatened oil price recovery.
The March 4 meeting takes on extra importance as Saudi Arabia decides the fate of its voluntary unilateral oil production cut of 1 million bpd in February and March.
While OPEC says compliance with the group’s agreed reductions has been exemplary, some countries are impatient to increase production.
The possibility that all or part of the Saudi production cut might be extended into April could provide the Saudis with extra leverage in negotiations over the actions of the group.