Vol. 26, No.10 Week of March 07, 2021
Providing coverage of Alaska and northern Canada's oil and gas industry

US burns up gasoline

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Oil rally resumes on massive fuel inventory draw, hopes of OPEC+ discipline

Steve Sutherlin

Petroleum News

Alaska North slope crude jumped $1.65 March 3 to close at $64.21 per barrel, West Texas Intermediate popped $1.53 to close at $61.28 and Brent rose $1.37 to close at $64.07.

Oil moved higher on the day with news of a massive drop in U.S. fuel inventories. The American Petroleum Institute reported a draw in gasoline inventories of 9.933 million barrels for the week ending Feb. 26. Analysts had expected a 2.3 million barrel draw for the week.

The strong demand for fuel offset worries about a build in crude oil inventories of 7.356 million barrels for the week. Analysts had expected an inventory draw of 928,000 barrels.

Supply and demand, rather than speculation, have underpinned oil’s rally so far, traders and analysts say, according to a March 3 report by the Wall Street Journal.

The ratio of positions held by money managers in WTI futures and options contracts betting oil prices will rise, versus positions betting on a fall, is below levels seen during the last big run-up in oil prices in 2018, the report said. “That suggests investors aren’t in the driving seat.”

Prices were bolstered March 3 by a Reuters report citing three sources that said that the Organization of the Petroleum Exporting Countries and allied producing countries was considering extending production cuts from March into April, rather than raising output.

The positive March 3 performance capped four days of losses that followed Feb. 24 closing prices that marked a record high since the pandemic price crash in April. ANS hit $66.29 that day.

While ANS and Brent weathered the four-day swoon with closes solidly in the in the $60s, WTI dipped below $60 on March 2, closing at $59.75 before recovering the next day.

Price weakness may have begun as a technical correction after the rapid recovery in prices since April.

The U.S. dollar was stronger as the week began March 1, pushing prices lower.

Near-term risks in the market also weighed on the market, Bloomberg reported March 1.

“China’s Unipec was re-offering cargoes of April Angolan crude amid weaker sales; diesel demand in India was also down versus a year earlier amid record pump prices in the country,” Bloomberg said. “Both point to a limit on some of the recent firmness seen within the oil market.”

Downward pressure may also have been accelerated by concerns that OPEC+ might decide to raise production too aggressively at its pivotal 14th OPEC and non-OPEC Ministerial Meeting on March 4, where the fate of existing production curbs of 7 million bpd would be decided.

Traders had few clues as to the outcome of the meeting. Russia reportedly was anxious to raise production, while Saudi Arabia urged caution, as did OPEC.

Mohammad Sanusi Barkindo, OPEC Secretary General, in remarks to the 49th Joint Technical Committee March 2 said OPEC+ needs to stay the course on restoring sustainable oil market stability.

“Both the global economic outlook and oil market prospects show signs of continued improvement,” Barkindo said. “We have come a long way from a year ago. The days of GDP and oil demand figures being in the red because of the pandemic-induced shock appear to be behind us.”

Yet continued uncertainties exist, he said, adding, “We must emphasize in strong terms: cautious optimism, cautious optimism, cautious optimism.”

Free cash flow beckons in 2021

The oil and gas industry could generate record free cash flow in 2021, but caution about spending could lead to supply shortages in the future, according to Wood Mackenzie.

“We think the world may be sleepwalking into a supply crunch in a few years’ time,” Tom Ellacott, Wood Mackenzie senior VP of research said in a Feb. 26 report. “It’s a new thing for IOCs to have access to cash but lack the appetite to invest.”

Ellacott said the longer investment stays low, the higher the probability Brent will be above $70 per barrel in the next few years.

By cutting distributions to shareholders, investment and operating costs, companies reduced the Brent price breakeven from $54 per barrel a year ago to $38 per barrel in 2021, he said. At an average price of $55 Brent, 40 companies WoodMac analyzed will generate $140 billion of free cash flow in 2021 before dividends, buy-backs and interest - at $70, it’s over $200 billion.

“Both would be the highest this century,” he said.

“But this upcycle is different,” Ellacott said. “Companies are keenly aware they need to prove that they can deliver on returns and cash generation to win back investors’ confidence; most will use any spare cash flow after dividends to pay down debt and bolster financial resilience.”

Company forecasts indicate planned spend for 2021 is 3.5% above the lows of 2020, but 28% or $53 billion below pre-crisis levels, he said.

“We won’t see a return to the boom years when the sector was spending way over cash flow,” he said. “U.S. independents are limiting spend to 70% to 80% of operating cash flow, and some even lower.”

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