ANS busts into $60s; pre-pandemic prices return as China gobbles oil

Steve Sutherlin

Petroleum News

Alaska North Slope crude busted out of the $50s to start the week Feb. 8, surging $1.15 to close at $60.72 per barrel. On Feb. 9, ANS rose another 51 cents to close at $61.23.

It’s been a year since ANS traded in the $60s, having begun its pandemic-induced slide in February 2020 as demand cratered and a surplus of more than a billion barrels glutted the markets.

The strong price movement so far in 2021 is faster and higher than expected by most analysts, and the reason may be China.

The roll out of COVID-19 vaccines has boosted market sentiment, but China has tangibly boosted demand in a January buying spree. Crude oil imports to China, at an estimated 12 million barrels per day in January, were 32.4% higher than the 9.06 million bpd imports in December, according to Refinitiv Oil Research estimates based on tanker tracking and deliveries.

China took advantage of the oil glut in April, when prices were at their pandemic nadir, opportunistically snapping up ultra-cheap spot cargoes from Alaska, Canada and Brazil. Spot cargoes of ANS crude sold at discounts as high as $6 from Brent crude prices.

China hoovered up tankerloads of crude that schooled at anchor off the U.S. West Coast - where most of ANS crude is sold - but not before the Trans-Alaska Pipeline System was forced into prorations, reducing oil throughput by 10% on April 24, and by 15% in May.

China is buying now in an atmosphere of greater balance between supply and demand. The Organization of the Petroleum Exporting Countries and affiliated producing countries are maintaining production discipline, as are U.S. shale producers, still struggling to get costs and debt under control.

ANS has in recent months been higher than Brent, and demand is stronger on the West Coast. TAPS is running proration-free, at 496,835 bpd as of Feb. 9.

China’s commodity hunger has not been limited to oil. Iron ore and coal imports in January have been robust, and the country has stepped up purchases of corn and other grains.

The buying may be driven by more than China’s returning fuel demand, relatively strong domestic airline traffic and industrial demand. Much importing in China is policy driven and subject to central planning. China’s plan may portend a new wave of exports in the future.

Brian Rich of Forbes Billionaire’s Pro Perspective’s maintains that China was the biggest winner in the recent U.S. presidential election.

“Under the new U.S. administration, they will go back to the business that got China so close (pre-Trump) to becoming the global economic superpower - ramping up the global supply chain and manipulating the currency to ensure it maintains global dominance in exporting,” Rich said in a Feb. 10 note, adding that the Shanghai Composite stock index was poised to break out to 5-year highs.

Other major oil prices indexes are flying high in tandem with ANS.

Brent crude crossed the $60 mark Feb. 8, up $1.22 to close at $60.56, gaining another 53 cents on Feb. 9 to close at $61.09.

West Texas Intermediate rose $1.12 to $57.97 Feb. 8, and it rose another 39 cents to $58.36 on Feb. 9.

Paradigm shift in the market?

“There seems to be a paradigm shift in the market,” said Phil Flynn, senior analyst at Price Futures Group in Chicago. “There is a sense that the glut of oil supply is disappearing more rapidly than anybody thought possible.”

But there is a sense of caution that the market may be getting ahead of itself.

“It’s a futures market, we always discount stuff that’s going to happen in the future, now. That’s why prices are rallying right now,” Amrita Sen, chief oil analyst at Energy Aspects said on Bloomberg TV Feb. 8.

Sen said perhaps the market has gotten ahead of itself because demand remains relatively weak, but she added that demand in the second half of the year looks much, much healthier and that improvement will continue in 2022.

“We’ve always called for $80 plus oil in 2022,” she said. “Maybe that is $100 now given how much liquidity there is in the system; I wouldn’t rule that out.”

The Trafigura Group trading house thinks prices will continue higher.

“The refiners will come for the oil,” Ben Luckock, Trafigura’s co-head of oil trading told Bloomberg Feb. 5. “We need to be careful how much crude stocks we draw.”

“If we can get through March and Easter without any serious difficulties, this market is seriously going to perform,” Luckock said.

Some analysts predict that higher prices will induce bickering within OPEC+, threatening the current alliance, but Luckock disagreed.

OPEC+ is comfortable with current prices being higher than forward prices - a structure known as backwardation, so it won’t move quickly to restore output cuts, he said.

“If we do rally and we are heavily backwardated at the front, OPEC won’t see a need to fix that because they like that situation,” said Luckock.

“The improved outlook as we come into summer has impacted price,” Vitol global head of research Giovanni Serio said. “The key questions now are whether demand delivers above or below expectations and just how much U.S. production is enticed back by the higher price.”

U.S. shale producers would need to bring on some 4.3 million barrels a day of shuttered production just to stay at current production levels because of the natural production decline of shale wells, according to Trafigura global chief economist Saad Rahim.

Rahim noted “extremely strong” new and used vehicle sales and excess savings of $2.5 trillion, approximately $8,000 for every person in the United States.

“New vehicle owners typically drive 20% more than other drivers in the first year of vehicle ownership,” he said.

- STEVE SUTHERLIN