Oil: Where to Next?
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