August whimpers in

COVID-19 fears offset Middle East tensions, drawdown of US gasoline stocks

Steve Sutherlin

Petroleum News

Oil prices turned lower to begin the month of August as wary traders eyed a spike in COVID-19 cases carried around the globe by the virulent delta variant of the virus.

Alaska North Slope crude dropped $2.09 Aug. 4 to close at $70.61 per barrel, while West Texas Intermediate slid $2.41 to close at $68.15, and Brent fell $2.03 to close at $70.38.

Fears of a coronavirus hit to the demand side were exacerbated on the supply side by a surprise 3.6 million barrel increase to U.S. crude inventories for the week ending July 30 reported by the U.S. Energy Information Administration Aug. 4. Analysts polled by Reuters had expected a 3.1 million barrel draw.

On a positive note, however, gasoline stocks fell by 5.3 million barrels, the EIA said, eclipsing expectations for a 1.8 million barrel drop and suggesting that U.S. fuel demand remains steady despite increases in coronavirus cases.

The declines marked a third straight day of red ink for the indexes that began with a downward jolt on Monday Aug. 2 that saw ANS down $2.32 to close at $73.55, while WTI dropped $2.69 to close at $71.26 and Brent plummeted $3.44 to close at $72.89.

The three-day slide stood in stark contrast to the previous week that ended with four straight days of gains in a two-week-long rally away from a mini-crash on July 19 that took WTI as low as $66.35 before reversing into a V-shaped recovery.

On Friday July 30, ANS closed out the month at $75.87, while WTI stood at $73.95, and Brent closed at $76.33.

WTI and Brent eked out slight gains in early trading Aug. 5, as tensions in the Middle East flared.

Israeli aircraft struck alleged rocket launch sites in south Lebanon in response to projectile fire towards Israel from Lebanese territory.

The airstrikes were a marked escalation at a politically sensitive time, France24.com reported, adding that Israel’s new eight-party governing coalition is striving to keep peace under a cease fire that ended an 11-day war with Hamas’ militant rulers in Gaza in May.

The region is on edge over an alleged Iranian attack on an oil tanker off the coast of Oman last week.

Oil price gains were held in check, however, by increasing locally transmitted COVID-19 cases in China, prompting new restrictions in some cities.

The delta variant has been detected in almost half of China’s 32 provinces in two weeks, and at least 46 cities have advised residents against non-essential travel, Bloomberg reported Aug. 4.

US DUC levels fall

The number of “live” DUCs in the country’s major oil regions hit 2,381 wells in June 2021, the lowest level since 2013, Rystad said.

Horizontal DUCs in the Permian, Eagle Ford, Bakken, Niobrara, and Anadarko regions combined fell to 4,510 wells by the end of June, implying a reduction of 1,800 wells from the peak of 6,340 in June 2020 and an average depletion of 150 wells per month over the past 12 months, the consultancy said.

The total includes so-called “dead” DUCs - or wells that were drilled more than 24 months earlier and remain uncompleted.

“Empirical evidence shows that more than 95% of wells drilled are typically completed within the first two years, and hence the probability of those more than two years old getting completed now are low,” Rystad said, adding that inclusion of “dead” DUCs to gauge future activity or forecast production is more speculative.

“Looking at the number of remaining ‘live’ DUCs, a significant oil supply response from the U.S. onshore industry to the $70-$75 per barrel WTI market is practically impossible before the first half of 2022,” said Artem Abramov, Rystad head of shale research. “Any further increases in fracking, and subsequently well completions, will now require producers to first expand drilling by adding more rigs.”

Live DUCs have declined across all major oil basins, with the Anadarko region the only exception, Rystad said.

The industry is not far from a complete normalization of the DUC inventory level, it said.

The number of horizontal live DUCs per rig has declined to 6.4 wells in the Permian and 9.2 in other major oil regions as of June, Rystad said. Prior to the COVID-19 downturn, the level was 3.9 for the Permian and 6.4 across other oil regions.

“Given the current activity and depletion trend, the industry will likely see a complete normalization by the end of September in the Permian, and by September-October across other oil regions,” Rystad said.