Brent, ANS test $30s as renewed supply swamps fragile demand recovery
If oil prices are range bound in the low to mid $40s, then trading action around the Labor Day weekend sent major crude benchmarks into the muck at the bottom of the channel.
Brent crude, sinking after a long stretch of reliably hugging the $45 level, dove briefly to $39.41 Sept. 8 for the October contract, while West Texas Intermediate went to $36.30. It was the first time Brent had crossed below $40 since June. Alaska North Slope crude closed at $37.65, down $2.96 for the day.
As Petroleum News went to press Sept. 9, prices were rebounding. Brent emerged above $40, WTI hit $38 and ANS rose to $38.83.
The swoon and recovery in oil prices coincided with broad volatility in financial markets. High flying tech stocks sold off sharply leading into the weekend and continued lower on Sept. 8 before rebounding Sept. 9.
Gold slipped to $19.14 Sept. 8, but recovered to $19.58 on Sept. 9.
Compounding the general risk-off sentiment in markets, Labor Day marked the end of the summer driving season, historically a bearish turning point for gasoline demand.
Gasoline demand has driven the recovery of oil prices from COVID-19 induced lows, leveling recently at 90% of 2019 levels. Jet fuel demand has been much slower to recover, with passenger demand stalled at half of 2019 levels.
Sentiment around transportation fuels is muted as coronavirus cases flare in India, Great Britain, Spain and several parts of the United States. Global COVID-19 infections have risen to more than 200,000 infections per day, while global deaths approached 900,000, according to John Hopkins University data.
The outbreaks threaten global economic recovery and raise concerns about continued improvement in demand for fuels.
Oil futures in New York began the downward drift Sept. 6 following a Saudi Aramco announcement that it had deepened price cuts on its key Arab Light grade for shipments to Asia, indicating weaker fuel demand. Aramco also lowered its prices to the United States for the first time in six months.
Only four of 10 Asian refiners said they would be trying to buy more Saudi crude after the Aramco price cut, according to a Bloomberg survey. Abu Dhabi National Oil Co. echoed the price cuts for Asia Sept. 8.
SupplyThe Organization of the Petroleum Exporting Countries and its allies helped to boost oil prices above $40 earlier in 2020 with an agreement to undertake record production cuts of 9.7 million barrels per day.
Citing improving demand, OPEC+ reduced its curtailment to 7.7 million bpd starting in August.
Production by the group rose by 1.71 million bpd to 34.63 million bpd in August from July levels, according to an S&P Global Platts survey released Sept. 9.
OPEC+ achieved compliance of 97% in August, Platts said.
U.S. onshore production is moving higher as well, as operators move to largely restore shut-in oil volumes by the end of the third quarter, according to a Rystad Energy analysis of 25 public oil operators’ second-quarter earnings released Aug. 14.
May curtailments at the companies peaked at 772,500 barrels per day, but cuts are expected to fall to a net 74,300 bpd in August, with nearly all production to be reactivated by September.
Despite a Baker Hughes survey showing a U.S. rig count of only 256 on Sept. 4, down 642 rigs from September 2019, U.S. shale operators are well positioned to maintain production going forward.
The recovery of fracking operations in the United States is happening largely thanks to an unusually high inventory of drilled but uncompleted wells, enough to sustain current levels without adding more rigs until deep into 2021, a Rystad survey released Sept. 4 said.
“Fracking activity for the rest of this year and early 2021 will be supported by the existing, abnormally high level of DUCs, though not all DUCs will be brought online quickly,” said Artem Abramov, Rystad Energy head of shale research. “Large, well-established operators will stay committed to capital discipline, only increasing their completion spend gradually in the current price environment.”
Rystad said that the Permian Basin - where the recovery in fracking has been most pronounced - can still accommodate 13 months of activity at last month’s pace.
The normal DUC-to-fracking ratio is about five months, which indicates that Permian operators are carrying an inventory equivalent to eight months of fracking at the current pace, Rystad said, adding that even if drilling operations in the basin stop completely, Permian fracking can be maintained at about 200-250 wells per month through the first half of 2021 before inventory returns to normal.
Drilling declined across major oil basins - Permian, Eagle Ford, Bakken, Niobrara and Anadarko - in the March to May period, Rystad said. Fracking bottomed in May and June before recovering sharply in July.
After DUCs run out, rig activity in the five regions will need 280-300 active rigs to maintain flat oil output, Rystad said, adding that while rig activity today is 50% lower than that requirement, the industry still has two to three quarters of leverage to achieve a smooth transition from a DUC-driven activity phase to a regular operations mode.