ANS holds low $80s
China opening, lower than expected US crude inventory build lend support
Alaska North Slope crude maintained a trading range in the low $80 for a full week, gaining 6 cents to close at $83.03 Jan. 25. West Texas Intermediate rose 2 cents to close at $80.15, and Brent fell a penny to close at $86.12.
(See chart in the online issue PDF)
Volatility was muted as the U.S. Energy Information Administration report released in the morning revealed a smaller than expected build in commercial crude oil inventories for the week ending Jan. 20. Inventories - excluding those in the Strategic Petroleum Reserve - rose just 500,000 barrels to 448.5 million barrels, 3% above the five-year average for the time of year. SPR inventories were unchanged for the week.
Total motor gasoline inventories increased by 1.8 million barrels for the period.
From Wednesday to Wednesday, ANS gained 92 cents from its closing price of $82.11 Jan. 18.
The weekly gain held up despite a round of profit taking as traders cashed in on a seven-week high driven by the unwinding of China’s strict zero-COVID policy that locked down large swaths of its population and industry in areas of COVID-19 outbreaks.
ANS dropped $1.60 Jan. 24 to close at $82.97, while WTI fell $1.49 to close at $80.13 and Brent plunged $2.06 to close at $86.13.
ANS rose 22 cents Jan. 23 to close at $84.57, as WTI rose 31 cents to close at $81.62 and Brent rose 56 cents to close at $88.19.
On Jan. 20, ANS added 97 cents to close at $84.36, WTI added 98 cents to close at $81.31 and Brent jumped $1.47 to close at $87.63.
ANS jumped $1.27 Jan. 19 to close at $83.39, as WTI rose 85 cents to close at $80.33 and Brent jumped $1.18 to close at $86.16.
Russian diesel sanctions drive uncertaintyThe European Union is about to sever diesel trading with Russia, its largest external diesel supplier, as sanctions on refined fuel from Russia go into effect in early February. The sanctions will launch in concert with the G7 global price cap on Russia’s refined fuel sales beginning Feb. 5.
Traders have warned that the sanctions could boost already inflated prices and worsen shortages.
“Any shortfall of Russian product exports could coincide with higher demand in China, tightening markets even further and raising the prospect of price spikes that renew inflationary pressure,” Henning Gloystein, Eurasia Group analyst told the Financial Times Jan. 23.
Some in the oil industry are more optimistic, reasoning that the supply chain - tested by pandemic, sanctions, and war - can quickly adapt.
Rystad Energy consultant Jorge Leon expects the sanctions will hobble Russia’s economy, rather than backfiring too aggressively on western economies.
“There is going to be a price impact, but it won’t be a game-changer,” Leon said. “European buyers have been stockpiling diesel including by raising imports from Russia in the past few months, so we’re starting this potential shock to the system in a reasonably good position.”
Europe will turn to new large-scale refineries in India and the Middle East and exports from China, to replace Russian supplies.
Leon said the refined fuel sanctions could lead to greater discounts on Russian oil.
Russia’s primary export grade crudes are trading at $40-$45 a barrel, a discount of some 50%.
“I suspect China and India are going to ask for even bigger discounts, potentially as much as 60%,” Leon said, adding that diesel is more complicated to transport long distances than crude oil.
EIA sees new crude production records aheadThe EIA has forecast that crude oil production in the United States will average 12.4 million barrels per day in 2023 and 12.8 million bpd in 2024, surpassing the previous record of 12.3 million bpd set in 2019. U.S. crude oil production averaged an estimated 11.9 million bpd in 2022, the EIA said.
“Increased production in the Permian region and, to a lesser extent, in the Federal Offshore Gulf of Mexico drives our forecast growth in production,” the EIA said. “We base our forecast on our expectations of crude oil prices and infrastructure capacity additions.”
The EIA forecast of crude oil production in the Permian rose 470,000 bpd to average 5.7 million bpd in 2023.
New natural gas pipelines coming online will allow producers to transport more natural gas that is produced along with crude oil to market, removing a potential constraint on crude oil production, it said.
The EIA called for crude oil production in the GOM to increase by 120,000 bpd in 2023, while production in other regions of the United States except for the Permian declines slightly.
In 2024, the EIA expects crude oil production in the Permian will increase by 350,000 bpd, while production in the GOM declines slightly. It forecasts that production in other U.S. crude oil-producing regions will increase by 70,000 bpd in 2024.
“We forecast the U.S. benchmark West Texas Intermediate crude oil price will average $77 per barrel in 2023 and $72/b in 2024, down from $95/b in 2022,” the EIA said. “Despite declining crude oil prices, we expect the WTI price will remain high enough to support crude oil production growth, especially in the Permian, where data from the Dallas Fed Energy Survey indicate that average breakeven prices range from $50/b to $54/b.”