The market is gradually beginning to give credence to something I’ve been discussing in past OilPrice articles for a long time now. In a June, 2020 article entitled, The blue line shows weekly storage numbers beginning to edge back into the five-year range.
We are now starting to work off this glut as noted in the weekly EIA petroleum status report above, and the day of reckoning I forecast in June is just around the corner, a few months hence at most. Even the news in
Obviously, the dramatic drop in production from April to May was primarily a product of the shut-in campaign producers waged to try and lever prices higher. A campaign we’d have to call a success, as prices have risen from $12.34 to over $42 since April, 28th.
June’s 914 will probably show a moderation or even an increase as producers started to bring production back mid-month in June, and continued on into July as prices ramped. I think that will probably be it and production will start a sharp decline through the end of the year. I stick to my prediction of a shift in mentality from, “I can get all of the oil I want all of the time,” to, “Where is my next load of oil coming from.” That’s my feeling for the start of Q-1, 2021.
Key Bullish indicators for oil prices
Drilling– no question, the continued decline in drilling in the USA has sealed the fate for shale, which is bullish factor number 1 for oil prices. Shale production has peaked and we will never again see shale production of over 9 mm BOPD. For the week ending Aug-7th the Baker Hughes rig count dropped slightly versus the week prior, continuing a five-month, largely uninterrupted trend down.
What does this profound decline in drilling portend? From January to now we’ve lost ~550 rigs. At an average of 800 BOPD per rig that’s 440K of new production we haven’t seen. Legacy decline amounts to about 300K BOPD through May. Those two numbers together come to roughly 750K BOPD. With only 246 rigs adding to new production there is a gap of ~500K BOPD from drilling activity YoY alone. The problem of the high legacy decline will only accelerate as this year closes out, and 2021 dawns.
The Economy – The bullishness that overcame the market in June, and began to dissipate in July put a top on oil prices. Inventory builds that occurred then sent ambiguous signals into the market. As we go into August, what’s becoming increasingly clear is we are adapting to this new reality faster than anyone thought possible. While the V shaped recovery is off the menu, we are recovering in terms of employment and overall business activity. Last the Wall Street Journal reported that 1.5 mm new jobs were added in July, dropping the unemployment rate to 10.6% of the working population.
Key OFS – Companies are raising hopes for the future, as noted by Halliburton’s CEO in their quarterly conference call, “a gradual recovery was underway.” A sentiment that was present in a number of conference calls for the second quarter.
Covid-19 – The good news here tends to be lost in the higher infection rate noise of Q-2. The real story is that the mortality rate is much less than initially thought, and the really good news is that relief-real relief is in sight. I am talking of course about vaccine trials, as noted in a recent Wall Street Journal article. The news here is unreservedly bullish.
Stimulus – The government basically fulfilled its function of stepping in in a number of ways to provide the trillions of dollars of stimulus and liquidity the market has demanded earlier this year. In my opinion more of this is needed, and I hope our political leaders can come together to provide it. There’s a narrative about the amount of new debt that’s been created. This narrative loses sight of the depth of
If 2020 averages 435 rigs per day, that’s ~350K BOPD new production from drilling for the year. In that scenario we add that new oil to what’s left after legacy decline, ~4.6 mm BOPD, and we get ~5-mm BOPD.
Numbers don’t lie. This is admittedly simple math for an incredibly complex actual-almost incalculable calculation, but if I am even close to being right, and storage truly does get worked off around the world…get ready for $100 oil.
By David Messler for Oilprice.com
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