Oil: Where to Next?

The latest trends in crude oil production, after the latest OPEC and Russian talks took place, make for an interesting reading. In its latest weekly report, shipbroker Gibson said that “this week global crude benchmarks plummeted to their lowest levels in 18 years, as Saudi Arabia and Russia became embroiled in an oil price war coinciding with a period of colossal demand destruction, threatening the future of the growing US shale industry. Expectations now are that global inventories will rise very fast and concerns are emerging that the world could run out of spare land-based storage capacity. One of the questions being asked is how quickly and how fast US crude production is going to be affected. Although the US shale industry is relatively young, the sector has already lived through an oil price collapse before. Back in late 2014, OPEC took a decision to abandon production quotas, with the cartel’s crude output rising gradually over the course of 2015 by over 2 million b/d. Increases in output translated into declining oil prices, which fell from $70/bbl in November 14 to under $35/bbl in January 2016. Lower prices impacted US crude production but not straight away. The country’s output actually continued to rise through to April 2015, while the drop in production became apparent only towards the end of 2015, with output falling by over 0.8 million b/d between September 2015 and July 2016. In the 2 nd half of 2016, oil prices started to rise once again and with it came a spectacular rebound in US production”.

According to the shipbroker, “the events back in 2015/16 suggest that it may take some time to see any meaningful decline in US crude production, despite the disastrous impact of Covid-19 on global demand and aggressive action by Saudi Arabia. In part, this is due to hedging programmes. Goldman Sachs indicated that US producers have 43% of their anticipated 2020 oil production hedged as of Q4 2019. Both the IEA and the EIA still expect US crude production to increase this year, although the growth rates have been reduced notably from previous expectations. There is also a possibility that the outlook for US crude production could be downgraded further, as news emerged that Pioneer Natural Resources and Parsley Energy asked the Texas state regulator to consider setting limits on how much oil large firms can send to the market”.

Gibson added that “the picture is gloomier for 2021, with just 2% of the expected US output being hedged. Shale producers are further slashing already reduced spending plans. Argus media reports that Occidental has announced a colossal $1.5-1.7 billion cut in its capital expenditure targeted for the year. Marathon plans around $0.5 billion in CAPEX reductions. Oil majors are in a better financial position to weather the storm, yet even they are not ruling out reduced spending. The EIA is suggesting that domestic output could decline by around 0.35 million b/d in 2021. The IEA is less pessimistic for next year at present; however, even they admit that the medium term outlook for the US crude production is considerably less positive than a year ago. Overall, the Paris-based agency anticipates a major deceleration in US oil supply growth over the next five years, with the US production flattening out around 2024/25”

The shipbroker concluded that “these forecasts paint a realistic scenario of how US crude production could evolve over the coming years. However, one of the biggest sensitivities right now is for how long the current production policy by Saudi Arabia and Russia continues, if US crude output does not start falling soon and fast. In this scenario, oil prices are likely to fall even lower. Earlier this week, Energy Aspects suggested that Brent could fall as low as $10/bbl. Iraq has called for all involved OPEC+ countries to return to negotiating table but so far the mediation efforts appear to have yielded no results. Going forward, could there be a change of heart?”, Gibson said.
Nikos Roussanoglou, Hellenic Shipping News Worldwide