It was an incredible week for crude oil! We have not seen an upward movement in the WTI as we have seen this week in … forever, as a percentage. Carried by a radical change of sentiment following an avalanche of good news in general, over a very short period of time, oil has skyrocketed.
Among these data, the key gross storage report turn out not to be as bad as originally feared and declining. In the last weeks edition of EIA-WPSR, a slight increase was expected, which turned into an actual decrease of 0.7 mm bbls. The market likes data like this, especially in the face of several months of bullish data so far.
Another welcome indicator of the market ready to turn positive is rising gas demand. We drive again and use gasoline in passenger cars, as opposed to the distillate used in large trucks used for logistics. Most recent figures STEO show a clear rebound in these critical fuels.
When you bow to the fact that airlines and travel agencies plan to take social distancing into account and hotels put in place deep cleaning plans, in order to resume service … the market has simply done a happy dance on Monday 18the, up almost a thousand points.
The market was also buoyed by signs that economic reopening appears to be taking place in a manageable way against the worst fears of a sharp increase in new virus cases. This was crowned by Monday news of a very promising vaccine for Covid.
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In this article, we will review some of the most recent relevant data from the shale patch and perform calculations on the orientation of oil and derivatives in the coming months. I’ll give you a hint, supply and demand are on the verge of being out of balance. Shortages of oil and refined products are on the horizon. Prices will rise sharply and soon.
The shale patch report
Considering all of the above, I think we have seen the bottom and have revised my forecast accordingly for the number of rigs and the fracturing gaps. I think this week we will see a slight increase in drilling for the first time since January. No complaints, but some new devices will find contracts. It should be noted that signs of a return to shale drilling will help maintain a price cap in the short term. In the longer term, as noted above, we believe they go much higher and will justify this belief later in this article.
I can be too bearish on the frac spreads that keep them flat throughout the month. Either way, it will take a little time to see a real recovery, given the overhang in stocks.
With this data and figures from today’s release of the drilling productivity report, we can begin to explore where production will fall from shale.
Principle # 1 – we will never produce 9 mm BOPD again from shale. The ability to do it simply no longer exists.
Principle # 2 – Capital will slowly start to turn into shale as prices improve. We are not suggesting a sharp rebound beyond $ 40 for a few months and this will limit the pace of recovery.
Principle # 3- We currently expect a 50% drop in shale production by the end of the year.
The No. 4 oil companies will begin to revalue their reserves upward in the third quarter, which will boost net asset value for the first time in several quarters.
I will come back to these principles in the “Your takeaways” section of this article.
Analysis of the drilling productivity report
Well, we have solid data and fairly lukewarm EIA speculation in this month’s report, organized and analyzed for you just now. It is important to understand that this report is not the last word and only extrapolates the trends observed by the governments that compile it. The EIA-914 is much more definitive, but is several months behind schedule.
EIA For a more precise analysis, we need to normalize this relationship with the EIA-914 expected at the end of the month. Production lifted from CIC activity in early March and fell like a stone in proportion to the decline in drilling and fracturing activities.
In a precedent OilPrice Article, I have already stated that drilling is now well below the replacement rate for new production. What does it mean? Let’s do some encryption.
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Using the new well-weighted average of 745 BOPD from each platform, we can then deduct a drop due to lack of drilling activity. Since March 2020, where we produced 9,175,000 BOPDs, we have lost 322 platforms. (322 X 745 = 239 K BOPD of new production lost). The decline inherited from March is equal to (9,175,000 X .6 = -3,670 mm annualized or / 365 X 60 = 603 K BOPD) Total activity declines. If you add these two sets 603 +239, you can represent 842 K BOPD of lost production. This seems to be able to follow fairly well within a margin of error with the ~ .9-mm or else the EIA forecasts a decrease for May. When you add it to the closed numbers, the estimates including from 300 to 500 K BOPD, means that American production is preparing for an abrupt decline, just during the month of may.
In summary, the decline in shale will only accelerate in the coming months as new (old) data arrives. Finally, the declines will ease as drilling and fracturing resume.
We maintain our previous forecast of a 2020 release for shale production in the United States of around 4.5-5.5 mm BOPD.
What does all of this mean globally?
Global demand turns to approx. 86 mm BOPD currently and is scheduled for May 11e edition of the linked STEO, to quickly increase through the rest of it to around 99 mm BOPD. With seven months remaining in the year, the average daily demand can be around 95 mm BOPD.
What happened with the supply? You can see above due to OPEC + cuts, we are down about 10 mm BOPD from the highs of 2019. Actual numbers could be several million BOPD higher when factoring in the reductions from producers like Norway, Canada, Brazil and a few others.
With the reductions we have planned and those officially announced, the world could see the end-of-year production of 6 to 8 mm of BOPD lower than forecast demand. Fear of shortages or supply disruptions often leads to sharp spikes in the price of oil. Witness the 15% peak in late December 2019, when it became clear that hostilities between the United States and Iran could spill over into armed conflict. This quickly dissipated when tensions eased and other concerns began to stimulate the oil market.
Supply and demand have followed each other fairly closely in recent years. In short, there is no direct analogy for the type of shortage that may loom on the horizon. In other words, we are in unexplored waters.
We have put forward reasonable arguments for a sharp increase in the price of oil by the end of the years. There is no guarantee that this will happen, but with the data we have seen, nothing is in sight to deter this possibility. This could be good news for long-suffering oil equity investors.
Oil stocks continue to be strongly undervalued as downward revisions to net asset values continued throughout this quarter. We believe that these downgrades are almost complete and that the oil companies will soon be able to increase their accounting valuations. This will cause share prices to rise, particularly for major companies like Chevron, (NYSE: CVX) and BP, NYSE: BP) who have aggressively taken goodwill and asset impairments in the past two quarters.
Savvy investors should review their portfolios to find places to add stocks at these depressed prices. It is likely that they will not stay at these levels for a long time.
By David Messler for Oilprice.com
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