Oil prices still have room – .

Oil prices still have room – .

In mid-year 2021, we see that we are in an unstable state when it comes to crude supplies. Of the three biggest contributors to the global supply, the United States, Russia and OPEC + (Russia is the “+” in OPEC +), all capable of producing more than 10mm of BOPD, we find that it is OPEC + a little in disarray. With the world now in deficit Regarding 2-3mm BOEPD oil production and demand, there is little margin for error.

In an article published in Reuters, the emerging dynamic of the current OPEC + meeting was the focus of attention. The main topic of the meeting, namely the pace at which the 2020 production cuts are expected to be phased out, appeared to be on the verge of deadlock as the UAE expressed dissatisfaction with its production base. The United Arab Emirates noted that other producers had benefited from increases since the earliest dates of the reduction agreement. According to OPEC rules, decisions on production must be unanimous.

In this article, we will review the anticipated production trends of these two key producers, the United States and that of the OPEC + cartel. The objective is to project production exit rates for them at the end of the year. Once we have these data points, we will sync with the EIA’s projected rates for global production for 2021.


To say that the members of this cartel and their honorary member, Russia, are happy with the direction oil prices have taken recently is to understate their jubilation. The arrival of nearly $ 80 Brent could not have come at a better time. Major producers like the Kingdom of Saudi Arabia (KSA) and Russia depend on oil revenues to finance their economies. In the case of KSA, it is well known that it takes $ 80 Brent to balance their books. In recent years they have been tap into cash reserves and sell part of their main reserve of wealth, Aramco.

Related: Major Oil Drain In Iraq Creates Opportunity For China

Russia has seen its sovereign wealth fund increase massively this year. A Reuters article notes that these funds will be used to finance much needed social programs and pension increases. With a parliamentary election slated for this fall, the timing of that cash bonus is exactly what the doctor ordered.

The stake of the current meeting was the addition of 400K BOPD to OPEP + output. An action that would reduce their original BOPD output cuts by 10mm, just over 4mm BOPD today. This additional volume would be increased monthly until December if the decision was approved, for a total BOPD increase of 2mm by the end of 2021.

The talks then collapsed, as noted in this report, due to the UAE-UAE’s demands for an increase in their base production. This is the level from which individual cuts are calculated and represents their capacity to produce. The UAE has spent billions to modernize its infrastructure since this limit was set and wants its baseline to reflect its new generation capacity.

Without modifying the output levels, OPEC exit would remain at the current level of around 25.4mm BOPD. All the entities agree that more barrels are needed to balance the market. OPEC members are expected to resolve this disagreement and come up with these additional barrels. Estimates are that OPEC has sufficient reserve capacity to eventually revert to ~ 34mm BOPD if economic circumstances warrant. The still a few questions as to how long it would take, however, some estimates go as high as a year for key fields to produce to their full potential. And, it’s also worth noting that some OPEC growers including Iran, Nigeria, Libya, and Venezuela under-produce their quotas due to decline or neglect of fields.

Russia currently produces around 10.75mm of BOPD and has gradually increased this production throughout the year. Bloomberg estimates that they have a reserve capacity of around 950,000 BOPD to increase production.

United States

One thing that has fundamentally changed is that the United States has lost the desire and the ability to increase production in the face of higher prices. This was something that had been taken for granted a few years ago as US shale production broke new records every month. Political winds have turned and low oil prices have made this ever-growing production unprofitable.

As I noted in a Oil price item last month, years of underinvestment by producers reeling from insanely low prices, decimated this well-established old capacity to about half of what it once could achieve. For those who missed it, it was said that it took 1,100 rigs and 450 field fracturing spreads to bring shale production to its all-time high in 2020 of 9mm BOPD.

Related: Russia Is Ready To Turn On The Taps

Years of losses to the service and supply industry have made it unlikely that this type of drilling and hydraulic fracturing “arsenal” could ever be reassembled. Industry executives have made it clear that growing output at any cost is no longer acceptable, preferring instead to pay down debt and reward bereaved shareholders with share buybacks and dividend increases. An example of the industry’s attitude towards increasing production was characterized by Clay Gaspar, CEO of Devon Energy in their analyst call Q-1-

“We do not intend to add any growth projects until demand fundamentals recover, excess inventory is absorbed and the reduced volumes of OPEC Plus are effectively absorbed by world markets. Most importantly, I encourage other producers to be very thoughtful and disciplined when it comes to capital plans. High returns on capital employed, low reinvestment rates, and free cash flow generation will determine the winners and losers in this coming cycle, not just top line growth. Devon will be a leader in this movement.

The current situation is detailed in the graph below. In preference to new boreholes, shale operators have chosen to dig wells drilled by DUC but not completed, instead of new boreholes. This is not a sustainable strategy over long periods of time, and shale production will eventually start to decline. Hence the nearly five-fold increase in fracturing deviations as opposed to the doubling of new platforms put into service.

Current shale production in the United States is 7.8 mm BOEP as the most recent EIA report on drilling productivity.

Your takeaway meals

With a worldwide demand of approximately 97 mm BOPD on our way to an OPEC forecast of 99.7mm BOPD by the end of the year, we will enter a 2mm BOPD deficit from production in the third quarter of 2021, or so around now . This can be seen in recent inventory declines which have brought inventory levels to near their lowest level in five years. Current US inventories, the 452 mm guns are 6% lower than these averages.

New production from previously scaled-down sources, such as Iran, may impact this outcome to some extent, but at best we will maintain a very tight supply-demand balance in the future.

All of this is favorable to the rise in crude oil prices at the start of the second half of 2021.

By David Messler for Oil Octobers

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