ANS stays above $50

Pandemic relief bill inked; Russia favors February OPEC+ supply increase

Steve Sutherlin

Petroleum News

Alaska North Slope crude oil index accomplished a 15-day run of closing prices above $50 per barrel, even as major oil indexes slipped to begin the short trading week heading into New Year’s Day.

ANS crude dropped 44 cents Dec. 28 to close at $51.46 per barrel, Brent lost 44 cents to close at $50.86 and West Texas Intermediate closed at $47.62, down 61 cents.

U.S. equities, however, moved higher Dec. 28 after President Donald Trump signed a $900 billion pandemic relief bill, a development bullish for oil demand.

The Dow Jones Industrial Average, the S&P 500, and NASDAQ closed Dec. 28 at record highs. Japan’s Nikkei index closed at a 30-year high.

The weakening oil prices on Dec. 28 may have occurred due to supply side concerns raised by comments made by Russian Deputy Prime Minister Alexander Novak at a Moscow press conference Dec. 25.

Novak said Russia would likely support a new supply increase beginning in February of 500,000 barrels per day by the Organization of the Petroleum Exporting Countries and its allied producing countries, of which Russia is a part.

The group, known as OPEC+, agreed in a December meeting to institute a 500,000-bpd production boost to begin in January, and it will hold its 13th OPEC and non-OPEC Ministerial Meeting Jan. 4 to consider production levels for February.

“To restore our output, that we’ve reduced a lot, the price range of $45 to $55 a barrel is the most optimal,” Novak told reporters in Moscow, according to Bloomberg. “Otherwise, we’ll never restore production, others will restore it.”

“If the situation stays normal and stable, we will support this position,” Novak said.

OPEC+ will end 2020 with a total production cut in place of 7.7 million bpd, which will drop to 7.2 million bpd in January. The group had scheduled a January production boost of 2 million bpd, but it agreed to a quarter of that amount due to spikes in COVID-19 cases.

“We must reach levels that were envisaged earlier, from Jan. 1, gradually, without pulling the market too much,” Novak said.

Looking for 2021 recovery

“Before the end of 2020, we have already seen a recovery in demand, but, nevertheless, we did not reach the parameters that we had before the crisis,” he said. “We hope that throughout 2021 we will, however, reach pre-pandemic figures.”

“Today, demand has not yet recovered by about 7-8 million barrels per day compared to the pre-crisis period,” Novak said, adding that the decline was much bigger, and this year most of the demand has already recovered.

“Next year, we expect additional growth in demand of about 5-6 million barrels (per day),” he said. “This is an optimistic forecast.”

Daniel Yergin, IHS Markit vice chairman, cautioned that demand recovery will take time.

Oil demand is not likely to return to late 2019 levels until the end of next year or even later, Yergin told Al Arabiya in a Dec. 28 interview.

Asked if U.S. shale could ever recover to its previously rapid, multi-million barrels per day year-on-year growth, Yergin said, “Let me give you a very simple answer, the answer is no.”

“The view that we have at IHS Markit is that shale will be pretty much at a flat level around 11 million barrels per day until the second or third quarter of next year when we start to see it rise again with prices and demand coming back, but that would be a much more modest rate,” he said. “So that 1.5 million barrels per day, that 2 million barrels per day that was so disruptive for the oil market, that’s history.”

When demand begins to return, the low-cost producers of the Arabian Gulf could be the ones to benefit, Yergin said.

“I think we will see oil prices rise when we get out of what I describe, or what I like to call the virus alley - oil prices stuck between the virus on one side and vaccines on the other - and once we get back to normal economic growth next year … about 3.6%, we’ll see demand rise and prices will get into a more reasonable range that will support investment and will at least draw back some investors,” he said.

The recovery in prices is likely to be gradual, Yergin said, adding that it would lack the price spikes that were associated with demand growth in the 2000s.

“I don’t see a spike in prices like we had with emerging market demand growing in the first decade of this century, and I think that there is a greater sense of energy security because of the growth of oil supply around the world, and shale is one of stabilizers for that, and I think from the viewpoint of the oil industry it’s a good thing not to have price spikes because that also negatively effects demand,” he said.

According to Allyson Cutright, director of the global oil service division at Rapidan Energy Group, prices may get worse in 2021 before they get better.

“We expect a pullback here shortly, similar to what we saw happen in early September, and that’s primarily because we don’t see the vaccines really impacting demand until the second half of the year,” Cutright told Investors Business Daily.

Rapidan expects Brent to average $45 per barrel for 2021 and WTI to average $43.

Cutright said the United States likely would reenter the Iranian nuclear agreement by the middle of 2021.

If sanctions on Iranian crude are lifted, 1.8 million bpd would likely come back to the market.

“So, it’s going to be another rough year, though not as bad as 2020,” she said.

Jet fuel remains the soft spot in demand for transportation fuels.

Industry-wide revenue passenger-kilometers fell by 70.6% year-on-year in October, a modest improvement from the 72.2% decline in September, The International Air Transport Association said in its December 2020 report on the Americas.

“As in the previous months, the gain was driven by domestic markets,” the IATA said.

According to the U.S. Energy Information Administration, jet fuel consumption by U.S. airlines on Thanksgiving 2020 was 42% of the amount consumed on Thanksgiving 2019.

Brent and WTI moved more than 1% higher in early trading Dec. 29 as Petroleum News went to press, Brent up 57 cents to $51.43, and WTI up 52 cents to $48.14.