Analys

QT is good for OPEC

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6 år sedan

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17 december, 2018

It is quite clear that the strong rebound in US shale oil production since early 2016 has been fuelled by access to cheap and easy money derived from the world’s central banks QE programs. It is not to say that US shale oil is not viable at the right price. US shale oil business has however been running at negative cash flow year after year with growth being bankrolled by investors. Not even in Q3-18 this year when Brent averaged $75.8/bl and WTI averaged $69.5/bl did they in total have positive cash flow. Since the start of 2017 the three main US shale oil producers (EOG, Continental Resources and Pioneer Natural Resources) have had an average negative equity return of -13% while Equinor has yielded +21% and S&P 500 has yielded +16% to end of Friday last week.

Bjarne Schieldrop, Chief analyst commodities

Quantitative tightening is now blowing out credit spreads. US high yield junk rated credit spreads have jumped to 5.5% over investment grade in Q4-18. Not a single company in the US has been able to borrow money in the $1.2trn high yield market so far in December which is the worst since November 2008 according to FT today. So easy money is rapidly drying up for US shale oil players which means that they will likely have to run disciplined according to cash flow. That implies much softer US shale oil production growth in a market where the high yield US junk bond energy credit market is closed and Brent and WTI prices are $60/bl and $51/bl respectively.

What matters for US shale oil production growth is US shale oil well completions per month and how much new production they bring that month versus losses in existing production that month. As production has moved higher and higher the running losses in existing production has moved comparably higher as well. At the moment losses are running at a rate of 530 k bl/d/mth. So US shale oil production is losing half a million barrels per day each month. So more and more wells needs to be completed each month to counter this. The net of new production from well completions and losses in existing production is what brings either growth or decline in US shale oil production.

In October US shale oil producers completed 1308 wells. In real, productivity adjusted terms this is the highest level ever and it is 57% higher than the real, average level in the peak year of 2014. But losses in existing production have increased strongly as well.

We have calculated the “steady state US shale oil well completion rate (SSCR)” meaning the number of well completions needed in order for US shale oil production to move sideways. US shale oil production is growing when the monthly completion rate is above the SSCR and it is contracting when it is below the SSCR. In October completions were running at 231 wells (18%) above the SSCR. Completions were however running at a rate of 35% above the SSCR level in September 2017. As a result the marginal, annualized production growth in the US was much stronger in late 2017 than what it is right now. In late 2017 the 6mth average, marginal annualized US shale oil production growth was running at a stunning 1.9 m bl/d/yr. It is still running at a very strong 1.5 m bl/d/yr rate, but the last monthly data point for October (marginal, annualized) was down to 1.3 m bl/d. And that was despite the fact that real well completions were at an all-time-high of 1308 wells.

So more and more wells needs to be completed in order to keep growth going. At current crude oil price levels the US shale oil business is running a negative cash flow and equity owners have lost money since the start of 2017 and the US high yield energy market now seems to have closed. US shale oil well completions are in our calculations running at an 18% completion rate above the SSCR level. So US shale oil players only need to reduce completions by 231 wells ( or 18%) per month to bring the marginal US shale oil production growth rate to zero.

If crude oil prices continue at these levels this is probably exactly what we’ll see: well completions will be brought down to the SSCR level and we’ll have zero marginal production growth in US shale oil production. So far OPEC+ has put a floor under crude oil prices with Brent crude at $60/bl. If we stay at this price the well completion rate will probably be brought down towards the SSCR level and US shale oil production will stop growing for a while. Lower oil prices and lack of credit (due to QT) will now most likely give OPEC+ a helping hand in the market balancing.

Today we’ll have the latest US EIA Drilling Productivity report showing the well completions in November. It will be extremely interesting to see if prices already have started to bite so and the completion rate has started to tick lower from October to November. Losses in existing production have definitely ticked one notch higher since October and the marginal, annualized production growth has probably ticked lower.

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Stronger inventory build than consensus, diesel demand notable

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Yesterday’s US DOE report revealed an increase of 4.6 million barrels in US crude oil inventories for the week ending February 14. This build was slightly higher than the API’s forecast of +3.3 million barrels and compared with a consensus estimate of +3.5 million barrels. As of this week, total US crude inventories stand at 432.5 million barrels – ish 3% below the five-year average for this time of year.

Ole R. Hvalbye, Analyst Commodities, SEB

In addition, gasoline inventories saw a slight decrease of 0.2 million barrels, now about 1% below the five-year average. Diesel inventories decreased by 2.1 million barrels, marking a 12% drop from the five-year average for this period.

Refinery utilization averaged 84.9% of operable capacity, a slight decrease from the previous week. Refinery inputs averaged 15.4 million barrels per day, down by 15 thousand barrels per day from the prior week. Gasoline production decreased to an average of 9.2 million barrels per day, while diesel production increased to 4.7 million barrels per day.

Total products supplied (implied demand) over the last four-week period averaged 20.4 million barrels per day, reflecting a 3.7% increase compared to the same period in 2024. Specifically, motor gasoline demand averaged 8.4 million barrels per day, up by 0.4% year-on-year, and diesel demand averaged 4.3 million barrels per day, showing a strong 14.2% increase compared to last year. Jet fuel demand also rose by 4.3% compared to the same period in 2024.

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Analys

Higher on confidence OPEC+ won’t lift production. Taking little notice of Trump sledgehammer to global free trade

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5 dagar sedan

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19 februari, 2025

Redaktionen

Ticking higher on confidence that OPEC+ won’t lift production in April. Brent crude gained 0.8% yesterday with a close of USD 75.84/b. This morning it is gaining another 0.7% to USD 76.3/b. Signals the latest days that OPEC+ is considering a delay to its planned production increase in April and the following months is probably the most important reason. But we would be surprised if that wasn’t fully anticipated and discounted in the oil price already. News this morning that there are ”green shots” to be seen in the Chinese property market is macro-positive, but industrial metals are not moving. It is naturally to be concerned about the global economic outlook as Donald Trump takes a sledgehammer smashing away at the existing global ”free-trade structure” with signals of 25% tariffs on car imports to the US. The oil price takes little notice of this today though.

Bjarne Schieldrop, Chief analyst commodities, SEB

Kazakhstan CPC crude flows possibly down 30% for months due to damaged CPC pumping station. The Brent price has been in steady decline since mid-January but seems to have found some support around the USD 74/b mark, the low point from Thursday last week. Technically it is inching above the 50dma today with 200dma above at USD 77.64/b. Oil flowing from Kazakhstan on the CPC line may be reduced by 30% until the Krapotkinskaya oil pumping station is repaired. That may take several months says Russia’s Novak. This probably helps to add support to Brent crude today.

The Brent crude 1mth contract with 50dma, 100dma, 200dma and RSI. Nothing on the horizon at the moment which makes us expect any imminent break above USD 80/b

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Analys

Brent looks to US production costs. Taking little notice of Trump-tariffs and Ukraine peace-dealing

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6 dagar sedan

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17 februari, 2025

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Brent crude hardly moved last week taking little notice of neither tariffs nor Ukraine peace-dealing. Brent crude traded up 0.1% last week to USD 74.74/b trading in a range of USD 74.06 – 77.29/b. Fluctuations through the week may have been driven by varying signals from the Putin-Trump peace negotiations over Ukraine. This morning Brent is up 0.4% to USD 75/b. Gain is possibly due to news that a Caspian pipeline pumping station has been hit by a drone with reduced CPC (Kazaksthan) oil flows as a result.

Brent front-month contract rock solid around the USD 75/b mark. The Brent crude price level of around USD 75/b hardly moved an inch week on week. Fear that Trump-tariffs will hurt global economic growth and oil demand growth. No impact. Possibility that a peace deal over Ukraine will lead to increased exports of oil from Russia. No impact. On the latter. Russian oil production at 9 mb/band versus a more normal 10 mb/d and comparably lower exports is NOT due to sanctions by the EU and the US. Russia is part of OPEC+, and its production is aligned with Saudi Arabia at 9 mb/d and the agreement Russia has made with Saudi Arabia and OPEC+ under the Declaration of Cooperation (DoC). Though exports of Russian crude and products has been hampered a little by the new Biden-sanctions on 10 January, but that effect is probably fading by the day as oil flows have a tendency to seep through the sanction barriers over time. A sharp decline in time-spreads is probably a sign of that.

Longer-dated prices zoom in on US cost break-evens with 5yr WTI at USD 63/b and Brent at USD 68-b. Argus reported on Friday that a Kansas City Fed survey last month indicated an average of USD 62/b for average drilling and oil production in the US to be profitable. That is down from USD 64/b last year. In comparison the 5-year (60mth) WTI contract is trading at USD 62.8/b. Right at that level. The survey response also stated that an oil price of sub-USD 70/b won’t be enough over time for the US oil industry to make sufficient profits with decline capex over time with sub-USD 70/b prices. But for now, the WTI 5yr is trading at USD 62.8/b and the Brent crude 5-yr is trading at USD 67.7/b.

Volatility comes in waves. Brent crude 30dma annualized volatility.