Oil Prices Have Been in Turbulent Downtrend Since Mid-2022

Global oil prices have been in a turbulent downtrend since the middle of 2022.

That’s what BofA Global Research stated in a new report sent to Rigzone on Tuesday, highlighting that oil has fallen $40 per barrel since early June.

“It now appears Russia may continue to operate with limited supply losses, which goes against the expectations of many market watchers,” BofA Global Research said in the report.

“Furthermore, warmer weather has limited heating demand for oil and caused global gas prices to collapse, which may facilitate an unwind of some gas-to-oil switching from 2022. These factors have contributed to oil price weakness, even as the broader macro has held up better than expected,” BofA Global Research added in the report.

“Now, oil prices are trading around $80 per barrel Brent, a level that OPEC+ defended late last year and may need to do again if fundamentals deteriorate further,” the company continued.

Brent closed at $123.58 per barrel on June 8, 2022, before dropping to a close of $76.1 per barrel on December 9, 2022. Brent rose to settle above $89 per barrel on January 23, but has since dipped below the $80 per barrel mark.

Big Shale Supply Swing Not Expected

In the report, BofA Global Research noted that, even though oil prices have fallen by more than $40 per barrel, the company doesn’t expect a big supply swing from U.S. shale “similar to the ones observed in the 2010s”.

“In the last three years, U.S. E&Ps have matured, stopped chasing growth, and prioritized capital discipline, deleveraging, and shareholder returns,” BofA Global Research stated in the report.

“Now, a comfortable buffer exists between spot oil prices and prices needed to force oil E&Ps to significantly cut capex, making E&Ps more resilient to the recent correction. That said, the industry faces medium term challenges,” BofA Global Research added.

“First, productivity and efficiency gains appear to have peaked. Second, the oilfield service sector has also become disciplined, giving them pricing power and driving upstream inflation, which could discourage any plans to accelerate activity. Third, tier one drilling inventory now appears to be visibly shrinking, which may discourage higher activity. These factors lead us to conclude that shale oil production could peak in the next three to four years,” the company continued.

Oil Market Keys

After delivering nearly 80 percent of non-OPEC supply growth for over a decade and driving down the global supply cost curve (and oil prices), short cycle U.S. shale is now handing the oil market keys back to OPEC, namely the GCC countries, BofA Global Research said in the report.

“Over the medium term, we see around three million barrels per day of capacity growth across Saudi Arabia, the UAE, and Kuwait, which would give them a bigger buffer to manage tight oil markets,” BofA Global Research added.

“GCC capacity expansions are important if shale elasticity fades and longer cycle oil projects start to drive growth again. Outside the GCC, OPEC’s prospects are less bright,” the company went on to state.

OPEC Meetings

On February 1, the 47th Meeting of the Joint Ministerial Monitoring Committee (JMMC) took place via videoconference. The Committee reviewed the crude oil production data for the months of November and December 2022 and noted the overall conformity for participating OPEC and non-OPEC countries of the Declaration of Cooperation (Doc), a statement posted on OPEC’s website noted.

“The Members of the JMMC reaffirmed their commitment to the DoC which extends to the end of 2023 as agreed in the 33rd OPEC and non-OPEC Ministerial Meeting (ONOMM) on 5th of October 2022, and urged all participating countries to achieve full conformity and adhere to the compensation mechanism,” the statement added.

The last OPEC and non-OPEC Ministerial Meeting took place via videoconference on December 4, 2022. At that meeting, OPEC+ decided to hold production steady. The meeting followed a decision by the group back in October to cut overall production by two million barrels per day from its August 2022 required production levels, starting November 2022.

The next meeting of the JMMC is scheduled for April 3, while the next OPEC and non-OPEC ministerial meeting is scheduled for June 4.

To contact the author, email andreas.exarheas@rigzone.com