The oil market is already looking beyond Omicron

We are halfway through the first month of the new year and the bull run for oil shows no signs of slowing down. Oil futures jumped 12% in the first two weeks of trading in the new year, boosted by several catalysts including supply constraints, fears of a Russian attack on neighboring Ukraine and the growth sign that the Omicron variant will not be as disruptive as feared.

Brent crude futures settled $1.59, or 1.9%, higher in Friday’s session at a 2.5-month high of $86.06 a barrel, gaining 5, 4% on the week, while U.S. West Texas Intermediate crude gained $1.70, or 2.1%, to $83.82 a barrel, up 6.3% on the week. Brent and WTI futures have now entered overbought territory for the first time since late October.

People looking at the big picture realize that the global supply versus demand situation is very tight and that is giving the market a solid boost,” Phil Flynn, principal analyst at Price Futures Group, told Reuters.

“If you consider that OPEC+ is still far from reaching its overall quota, this shrinking cushion could prove to be the most bullish factor for oil prices in the coming months,” PVM analyst Stephen Brennock said.

Indeed, several banks have forecast oil prices of $100 a barrel this year, with demand expected to outstrip supply, largely due to OPEC’s limited capacity.

Morgan Stanley forecasts Brent crude to hit $90 a barrel in the third quarter of this year, while JP Morgan predicted that oil would hit $125 a barrel this year and $150 in 2023. Meanwhile, senior vice president of analysis at Rystad Energy Claudio Galimberti said that while OPEC was disciplined and wanted to maintain the tight market, it could drive prices up to $100.

OPEC+ recently came under pressure to ramp up production at a faster rate starting in multiple quarters, including the Biden administration to ease supply shortages and rein in soaring oil prices. But the organization is afraid of spoiling the oil price party by taking sudden or big action with last year’s oil price crash still fresh in its mind.

But maybe we’ve overestimated the power the cartel has to increase production on the fly.

Source: Reuters

According to a recent report, at the moment, only a handful of OPEC members are able to meet higher production quotas than their current clips.

Amrita Sen of Energy Aspects told Reuters that only Saudi Arabia, the United Arab Emirates, Kuwait, Iraq and Azerbaijan are in a position to increase their production to meet the quotas set by OPEC, while the other eight members are likely to struggle due to steep production declines and years of underinvestment.

Underinvestment is holding back the recovery

According to the report, African oil giants Nigeria and Angola are the hardest hit, with the pair having pumped an average of 276 kbpd below their quotas for more than a year now.

The two nations have a combined OPEC quota of 2.83 million bpd according to Refinitiv data, but Nigeria has not reached its quota since July last year and Angola since September 2020.

In Nigeria, five onshore export terminals run by oil majors with an average production of 900,000 bpd handled 20% less oil in July than the same period last year despite relaxed quotas. The declines are due to lower production from all onshore fields that supply the five terminals.

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In fact, only the French oil major TotalEnergies“(NYSE: TTE), the new Egina Deep Offshore Oilfield and Export Terminal has been able to rapidly ramp up production. Reopening the taps proved to be a bigger challenge than previously thought due to a shortage of workers, huge maintenance backlogs and tight cash flow.

Indeed, it could be at least two quarters before most companies can pay their maintenance backlogs, which cover everything from servicing wells to replacing valves, pumps and sections of pipeline. . Many companies have also delayed plans for additional drilling to keep production stable.

Angola is no better off.

In June, Angolan Oil Minister Diamantino Azevedo lowered his 2021 oil production target to 1.19 million bpd, citing production cuts in mature fields, drilling delays due to COVID-19 and “technical and financial challenges” in deep-sea oil exploration. That’s nearly 11% below its OPEC quota of 1.33 million bpd and a far cry from its all-time high above 1.8 million bpd in 2008.

The South African nation has struggled for years as its oil fields steadily dwindled while exploration and drilling budgets failed to keep up. Angola’s largest fields began production about two decades ago, and many are now past their peaks. Two years ago, the country adopted a series of reforms aimed at stimulating exploration, in particular by allowing companies to produce from marginal fields adjacent to those they already operate. Unfortunately, the pandemic delayed the impact of these reforms, and not a single drilling rig was operational in the country in May, the first time this had happened in 40 years.

So far, only three offshore platforms have resumed work.

Shale decline

But it’s not just OPEC producers struggling to boost oil production.

In one great editorial, IHS Markit Vice President Dan Yergin, observes that it is almost inevitable that shale production will reverse and decline thanks to drastic cuts in investment and only recover later at a slow pace. Shale oil wells are declining at an exceptionally rapid rate and therefore require constant drilling to replenish lost supply.

Indeed, Norwegian energy consultancy Rystad Energy recently warned that Big Oil could see its proven reserves run out in less than 15 years, thanks to volumes produced not being fully replaced by new discoveries..

According to Rystad, the proven oil and gas reserves of the so-called big oil companies, namely ExxonMobil, BP Plc. (NYSE:BP), Shell (NYSE:RDS.A), Chevron (NYSE: CVX), TotalEnergies SE (NYSE: TTE), and Eni SpA (NYSE:E) are all down as volumes produced are not fully replaced by new discoveries.

Admittedly, this is more of a long-term problem whose effects may not be felt anytime soon. However, with growing sentiment against oil and gas investments, it will be difficult to change this trend.

Experts warn that the fossil fuel sector could remain depressed thanks to a great enemy: the trillion-dollar ESG megatrend. There is growing evidence that companies with low ESG scores are paying the price and are increasingly being shunned by the investment community.

According to Morningstar research, ESG investments reached a record $1.65 trillion in 2020, with the world’s largest fund manager, BlackRock Inc. (NYSE:BLK), with $9 trillion in assets under management (AUM), putting its weight behind ESG and oil and gas divestments.

Michael Shaoul, chairman and CEO of Marketfield Asset Management, told Bloomberg TV that ESG is a big part of the backlog in oil and gas investing:

Energy stocks are a far cry from where they were in 2014, when crude oil prices were at current levels. There are a few very good reasons for this. The first is that it’s been a terrible place for a decade. And the other reason is that the ESG pressures that many institutional managers face lead them to want to underestimate investments in many of these areas.”

In fact, US shale companies now face a veritable dilemma after disavowing new drilling and prioritizing dividends and debt repayment, but their stocks of producing wells continue to fall off a cliff.

According to the US Energy Information Administration, the United States had 5,957 drilled but uncompleted (DUC) wells in July 2021, the lowest for any month since November 2017, down from nearly 8,900 at its 2019 peak. , shale producers will have to sharply accelerate the drilling of new wells just to maintain the current production clip.

If we need further evidence that shale drillers are sticking to their new psychology of discipline, there is recent data from the EIA. This data shows a sharp decline in CIDs in most of the major onshore oil-producing regions of the United States. This, in turn, indicates more well completions, but less new well drilling activity. It is true that higher completion rates have led to higher oil production, especially in the Permian; however, these completions have sharply reduced CIC’s inventory, which could limit US oil production growth in the coming months.

It also means spending will have to increase if we want shale to keep pace with production declines. More will have to come online, which means more money.

By Alex Kimani for

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