NS crude rips higher

Million-bpd Saudi cut woos oil bulls, even with uncertain 2021 outlook

Steve Sutherlin

Petroleum News

North Slope crude is on a tear again, closing Feb. 2 at $57.74 per barrel, up $1.27 as Saudi Arabia’s voluntary unilateral oil production cut took 1 million barrels per day off the market starting at the beginning of the month.

Brent followed closely, closing at $57.46, up $1.11, while West Texas Intermediate closed $1.21 higher at $54.76.

Prices continued higher Feb. 3, with WTI trading up 26 cents to $55.95 and Brent rising a dollar to $58.46 at Petroleum News press time.

The Organization of the Oil Producing Countries and its allied producing countries maintained oil output policy Feb. 3 at its Meeting of the Joint Ministerial Monitoring Committee, even as crude hit its highest prices in almost a year.

Overall conformity with the original production adjustments was 101%, reinforcing the trend of high compliance by participating countries, the committee said in a statement, adding that since the April 2020 Ministerial Meeting, OPEC and non-OPEC countries have adjusted oil production down by a cumulative 2.1 billion barrels, stabilizing the oil market and accelerating the rebalancing process.

The committee said that while economic prospects and oil demand would remain uncertain in the coming months, the rollout of vaccines around the world is a positive factor for 2021, boosting the global economy and oil demand.

Wood Mackenzie echoed the theme of uncertainty in its Jan. 28 Oil Markets 2021 report.

WoodMac expects 2021 oil demand to average 96.7 million barrels per day, up 6.3 million bpd from 2020.

Its short-term base case sees vaccine distribution accelerating through 2021, with 5% expected growth in global gross domestic product, following a 5.4% contraction in 2020.

The consultancy indicated that two key, inter-linked, areas will shape the pace and strength of the global liquids demand recovery in 2021: the pace of COVID-19 vaccine distribution, and the pace of global economic recovery.

Larger economies have an advantage on vaccine procurement. Vaccine development has been centralized in the U.S., the UK, China, Russia and India, but smaller economies face challenges in procurement.

Containment of the coronavirus supports recovery in domestic air travel before international travel begins to recover, WoodMac said. Airlines and/or countries may require proof of COVID-19 vaccination for international flights, and travelers may choose to visit countries where largescale vaccination has been achieved.

The balance between mass transit and automobile travel has yet to reset.

“Since nationwide lockdowns in Q2 2020 were lifted, public transit use has remained low in major economies, according to Apple’s Covid-19 mobility data, while road fuel demand has recovered more quickly in Q3 2020,” WoodMac said. “As vaccine deployment escalates in 2021, will commuters continue to shy away from mass transit in favor of personal vehicles, potentially boosting the transport fuel demand recovery?”

The rise of COVID-19 variants and uncertainties surrounding vaccine efficacy has added a layer of concern about the pace of recovery in 2021.

The pace of recovery will be tied not only to containment of the COVID-19 virus, but also to relief spending around the globe.

In India, as China did in 2020, government has proposed infrastructure projects in 2021 to help restore growth and reach GDP of $5 trillion in the next five years, WoodMac said. If the projects are approved, it would provide upside risk for India’s economic growth and fossil fuel demand.

Economic recovery in North America and Europe over the next few years relies on the service sector, which took the hardest hit from the Covid-19 pandemic and restrictions, WoodMac said, adding, “Recovery in the service sector is tied to the reopening of economies with successful Covid-19 containment.”

Global oil supply

OPEC+ had a plan that clearly articulated stages for the return of production after its initial steep cuts of nearly 10 million bpd, but the plan has become much less clear, WoodMac said.

“Starting January 2021, OPEC+ was due to ease its production restraint by 2 million bpd to 5.8 million bpd, but that step was waylaid in December by a complicated agreement to bring output back in increments to be decided at the start of each month, along with additional voluntary cuts by Saudi Arabia,” the consultancy said. “Some production restraint is needed in 2021 for market balance, but compliance could wane with demand recovery.”

WoodMac expects Lower 48 output to decline in 2021 - by 500,000 bpd in 2021 on a year on-year basis, a more moderate rate than in 2020.

“Rig activity is expected to continue to rise but much of the recovery rate is dependent on oil prices and the industry’s willingness to spend on volume growth again,” it said.

Global upstream development spend is forecast at $300 billion in 2021, apace with last year but off 30% from pre-crisis levels and 60% below 2014’s US$750 billion peak, WoodMac said.

WoodMac anticipates 20 major project sanctions in 2021, doubling 2020 levels but just half the prevailing pre-crisis trend.

Deepwater spend is underpinned by $50 billion of new projects approved in 2019 and 2020, mostly in U.S. Gulf of Mexico, Brazil and Guyana, WoodMac said. Another eight projects representing $30 billion of investment are near approval for 2021 - Bacalhau (Brazil), Mero (Brazil) and Whale (U.S.) are the biggest.