Vol. 26, No.3 Week of January 17, 2021
Providing coverage of Alaska and northern Canada's oil and gas industry

ANS crude clears $57

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Major indexes near one-year highs as ‘perfect storm’ levitates prices

Steve Sutherlin

Petroleum News

Alaska North Slope crude cleared the $57 mark Jan. 12, vaulting $1.08 to close at $57.23 per barrel, a new post-pandemic high.

Major crude indexes joined ANS to hit levels not seen since February 2020, approaching one-year highs.

Brent crude rose 92 cents to close at $57.23, and U.S. West Texas Intermediate closed at $53.21, up 96 cents.

The remarkable turnaround in oil prices was supercharged by an early January announcement by Saudi Arabia that it would unilaterally cut its own production by a million barrels per day in February and March.

Saudi Arabia is already cutting supplies, according to a Jan. 13 Reuters report.

Two North Asian refiners have received a 10% supply cut from state-owned Saudi Aramco, and February allocations for at least three Indian refiners have been cut between 15% and 26%, sources said on the condition of anonymity.

A number of factors heaped fuel on the flames, creating as near a perfect storm for price acceleration as could be expected under the circumstances, with COVID-19 cases on the rise and coronavirus mutations leading to lockdowns and travel restrictions.

Goldman Sachs reiterated its $65 price target for Brent in 2021, sweetening its outlook by calling for the price target to be hit in July, rather than year-end as previously forecast.

Damien Courvalin, Goldman head of energy research, unveiled an unexpected near-term source of oil demand, suggesting that it will be boosted by at least 1 million bpd in the coming weeks as cold weather spurs the use of diesel for power generation.

Courvalin cited frigid temperatures in Asia and Europe in the face of LNG supply issues, leading to a surge in local gas prices, according to a Jan. 13 report.

The latest round of U.S. economic stimulus is already being disbursed and reports out of Washington indicate that more stimulus is in the works for the near future, once the Biden administration takes the helm. The additional liquidity bodes well for demand, and it stokes expectations for repricing of commodities in general, while exerting downward pressure on the dollar - all bullish for oil prices.

An annual five-day rebalancing of portfolios starting Jan. 8 may also be pumping up demand. Analysts told Bloomberg rebalancing could attract as much as $9 billion buying into crude oil contracts, putting additional upward pressure on oil prices.

Rebalancing of indices to adjust weighting of assets in portfolios is done yearly to restore target allocations and risk levels, but this year may see more buyers into crude oil contracts because of a 20% oil price decline in 2020.

The supply side is abetting the surge as well.

The Organization of the Petroleum Exporting Countries, together with its allied producing countries, is showing remarkable discipline to hold the line on production as demand recovers.

U.S. crude inventories have eased lower for a fifth straight week, down by 3.2 million barrels last week, beating the expected 2.3 million barrel draw called for in a recent Reuters analyst poll, the Energy Information Administration said.

E&P companies worldwide have pulled the plug on exploration and development expenditures as the pandemic pinched prices and demand in early 2020. Turning up the taps takes investment, and it takes time.

“With vaccines being rolled out across the world, the likelihood of a fast-tightening market from 2Q 2021 is rising as the rebound in demand stresses the ability of producers to restart production,” Jeffrey Currie, Goldman global head of commodities research said in a note, Platts reported Jan. 11.

Prices let off some steam, wandering slightly lower in Jan. 13 trading. Brent crude prices closed at $56.06 per barrel, down 52 cents, and WTI closed at $52.91, a loss of 30 cents.

2021 shale activity set to jump

U.S. shale operators will likely see cash from operations, CFO, boosted by 32% in 2021, allowing them to increase drilling and completion activity spending, Rystad Energy said in a Jan. 7 release.

The projection assumes a $50 per barrel price scenario for WTI crude in 2021. At a WTI oil price of $40 per barrel for 2021 CFO would be expected to remain flat.

In the United States in particular, the rebound in prices - even before WTI hit $50 per barrel - helped shale producers generate record high free cash flow in the third quarter of 2020, Rystad said.

“This increased activity has already started to manifest itself, with rig activity for tight oil up 60% since the low point in August last year,” said Espen Erlingsen, head of upstream research at Rystad. “Completion activity is also recovering, measured by the number of wells started to be completed by month.”

CFO - a key driver for U.S. tight oil activity - correlates with the cash available for E&P companies to invest in new wells and represents the revenue minus all operational costs, royalty payments and gross and net taxes, the consultancy said.

The 2020 low point for completion was May, with 330 wells, down 75% from January, Rystad said. By December, completion activity had doubled since May to more than 700 wells.

In 2019, the CFO of shale operators in the Permian Midland, Permian Delaware, Eagle Ford, Bakken and DJ basins reached $87 billion, but the COVID-19 pandemic downturn caused CFO to plunge to what Rystad estimates was $55.7 billion in 2020.

“If the positive trend persists and WTI averages at $50 in 2021, we expect this year’s CFO to rise to $73.6 billion,” Rystad said.

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