How Quickly Will US Fossil Fuel Output Rebound?
(The views and opinions expressed in this article are those of the attributed sources and do not necessarily reflect the position of Rigzone or the author.)
On Friday the statistical arm of the U.S. Department of Energy released figures on how dramatically domestic fossil fuel production has changed since the onset of the COVID-19 pandemic. Moreover, it unveiled its projected timeline for a rebound in output. The graphs below from the report highlight the data EIA presented.
One of Rigzone’s regular market-watchers anticipates a different production recovery time frame from EIA’s. Keep reading to find out how he sees the situation differently, along with other insights, in this week’s installment of oil and gas market hits and misses.
Rigzone: What were some market expectations that actually occurred during the past week – and which expectations did not?
Tom McNulty, Houston-based Principal and Energy Practice leader with Valuescope, Inc.: The Energy Information Administration (EIA) report today that summarized fossil fuel production in the United States for 2020 was in line with most market participants that we know. Per the EIA, U.S. fossil fuel production declined by six percent from a record year – 2019. While the COVID pandemic might have been expected to drive this number down by a much larger amount, the six-percent decline illustrates that energy demand is resilient even with severe downward economic pressures. The EIA forecast for the production of all fossil fuels – including crude oil, coal and natural gas – to be flat this year and then to rise in 2022 might be correct. But it is more likely that fossil fuel production will rise this year and not wait for 2022.
Andrew Goldstein, President, Atlas Commodities LLC: In addition to positive vaccine news, WTI spot prices have rallied to near-yearly highs after Saudi Arabia surprised the market with a production cut last week. Also, discussion of a new stimulus plan has added to the rally in energy as of late.
Phil Kangas, US Partner-in-Charge, Energy Advisor, Natural Resources and Mining, Grant Thornton LLP: Industry largely sat out of last week’s long-anticipated Alaskan Arctic National Wildlife Refuge (ANWR) lease auction by the U.S. Department of the Interior’s Bureau of Land Management. Shifting political winds, anemic oil prices and the absence of available capital from large banks all signaled the auction would fail to generate broad-based participation. That left a state agency, the Alaska Industrial Development and Export Authority, to step into the void and submit winning bids for all but two of the leases. The state sought to preserve the availability of this land for exploration to support future revenue generation. Only two of the bids were competitive (earning more than a single bid) so nearly all the leases sold for the minimum price of $25 per acre.
Not surprisingly, gasoline prices are following the upward trend of crude. AAA (American Automobile Association) reported prices at the pump are at their highest point since the start of the pandemic, with the national average price per gallon last week reaching $2.29 per gallon. Surging crude prices reflect market exuberance from the Saudi/OPEC decision to limit production through March, notwithstanding expectations for a post-holiday increase in COVID-19 restricting travel and limiting economic activity.
Jake Sherman, Lead Analyst, uk.Investing.com: U.S. crude stockpiles again fell more than expected, most likely from an extension of year-end de-stocking, while gasoline/distillate inventories ramped up as predicted, proving that demand for fuel remains the weakest link.
Rigzone: What were some market surprises?
Goldstein: The rally in crude oil, both Brent and WTI, may come as a surprise to some. China recently locked down more than 22 million citizens, on top of extended curfews keeping people in their homes, as a new wave of COVID-19 hit.
Mark Le Dain, vice president of strategy with the oil and gas data firm Validere: LNG prices continued to hit records as Asia faced a cold streak amidst low inventory levels. Japan has also tried to recommend windows open where possible, even with cold weather, to minimize COVID spread. This power demand surge is also an interesting tailwind for fuel oil as utilities look to substitute.
Kangas: Both supply- and demand-side factors drove up WTI and Brent prices last week. Saudi Arabia-led OPEC supply production restrictions at a surprising rate – 1 million barrels per day – with Russian and Kazakhstan allowances for smaller offsetting increases. A spike in U.S. stock draws followed, further pushing up crude price per barrel. The EIA reported nearly a three-fold higher draw on crude inventories than expected: 8.01 million barrels versus expected 2.697 million barrels. Adding to the confluence of helpful factors, DOE reported that colder weather than normal in China drove up demand for fuel oil, increasing prices.
Sherman: It looks like we had another week of tax-related de-stocking of crude barrels for the end of 2020, which factored into the higher refinery utilization rates. U.S. crude exports have also held well at above 3 million barrels per day (bpd) versus last week’s near-record of 3.6 million bpd. While the crude numbers strengthen the narrative of “strong demand for oil,” that’s only half the story as fuel consumption statistics are still way below acceptable levels. There was another eye-watering 4.4 million-barrel build in gasoline, after the previous week’s 4.5 million. As for distillates, there was a rise of 4.8 million after the previous 6.4 million.
McNulty: Oil trading through $50 was a surprise. It is outrunning the latent capacity and velocity to produce here in the U.S. There were more than 7,000 DUCs (drilled but uncompleted wells) in the U.S. at the end of 2020, and WTI trading up will bring dozens of these wells into production during First Quarter 2021, which in turn brings more crude into the market. Look for oil to return to its post-COVID normalized range of $41 to $44.
WHAT DO YOU THINK?
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