Register

Peak Oil is You


Donate Bitcoins ;-) or Paypal :-)


Page added on February 11, 2021

Bookmark and Share

How Much Higher Can Oil Prices Go?

How Much Higher Can Oil Prices Go? thumbnail

Oil prices have rallied back to the point they are almost ready to match pre-Covid levels. There are two key drivers for this miracle, which no one predicted early on as being possible in this period of time. The first is the production curbs by U.S. producers and of course, the millions of barrels of oil per day withheld by the OPEC+ cartel. The second is recovering demand, putting-so far, slight pressure on supplies, and creating a market condition known as “Backwardation.” A market condition where the future price of a commodity is higher than the present, or “spot” price. This is bullish for long term crude prices.

WSJ

Another driver for the current push higher in oil prices is the expectation for continued stimulus for the U.S. economy. So far this expectation has buoyed prices over the concerns raised by Friday’s Labor report, suggesting that employment levels continue to cast a pall on the overall recovery.

One aspect of the speed at which this recovery has taken place is the meteoric rise of the share of many energy companies, with ExxonMobil, (NYSE: XOM), and ConocoPhillips, NYSE: COP) outperforming the rest of the market in the last couple of months. Shares of each are up 10% since late January, 2021.

John Kilduff, a well-known energy analyst was quoted in a recent WSJ article as saying, “The market definitely has some momentum! WTI is going to be targeting $60, too.”

What’s behind this move?

As I discussed in an OilPrice article last week, one of the keys to this support for crude, is the drawing down of inventories, both in the U.S. and globally. As noted in this article the Energy Information Agency, (EIA) reports that in the week of Jan-29th, inventories fell comfortably into the 5-year average for this time of year. This represents a decline of about 50 mm barrels in storage over this time.

Related Video: The Painful Death Of Coal

EIA

This fall in inventories has happened at a faster pace than most experts thought possible and helped to create the concern about future supplies that is pushing prices higher now. We are certainly not short of oil at this point, but the shift to backwardation from contango is noteworthy for the market.

As noted above, the key forces initiating this move are production restraints by U.S. producers, currently pumping about 2.4 mm BOPD less than a year ago, and OPEC+. Last week OPEC announced a cumulative total of 2.1 billion barrels have been withheld from the market since the April 2020 Covid crisis peak.

Another well-known energy analyst, Martin Rats of Morgan Stanley, was quoted by the WSJ as saying, “the amount of crude oil and petroleum products stored around the world down by about 5% since its peak in 2020.”

The Front-Month contract gap widens

On Friday the gap between the contract for the front-month and the one for March of 2022, widened to $5.16 per barrel. This is the biggest premium for next month contract since the start of the pandemic.

WSJ

This will have the effect of pushing prices into backwardation, as we have noted so far. Some analysts worry that this effect is exacerbated by the lack of long-dated contracts by airlines and other large purchasers to hedge their exposure to rising commodity prices.

Most think the current rally still has legs as the backwardation scenario gives traders an incentive to pull oil from storage and put it on the market, as opposed to paying for continued storage.

Will oil prices go to the moon in 2021?

The two most widely used indicators for the future of U.S. production are the number of drilling rigs actively tapping new oil reservoirs, and the number of frac spreads allowing production to begin from tight shale formations.

Data from PrimaryVision, chart by author

Higher prices spur increased activity in the shale patch as noted in the graphic above. Over time, if this continues, it will have the tendency to keep pricing from rising too fast, or even possible to put a lid on their eventual peak over the short-haul.

U.S. producers have promised repeatedly that the days of growth at any cost are in the past, and their goals are to maintain current production levels or to keep the rate of decline to a profitable level. Instead of growth, producers have focused on repairing damaged balance sheets caused by massive asset write-downs over the past couple of years, and rewarding patient investors with higher dividends as margins expand. That commitment is about to get a test as the U.S. rig count approaches the 400 level.

Related: Rosneft Stake Becomes Headache For Oil Major BP

There could be some questions about these commitments, made in the depths of the oil depression of 2020. U.S. producers have reduced their break-even levels for most wells in shale country to the mid-$30s in what’s called Tier I acreage. Those producers who are extracting oil from reservoirs in Tier I, are making money hand over fist at current prices and the return to a 400+ rig market could signal a flip-flop in their attitudes.

For the past year or so, the rate of new drilling has been below the typical 30-40% annual decline rate for shale formations. We are getting very close to a balance point, at which this decline rate will be exceeded, and new production will tend to push inventory levels higher.

We could be nearing a short term peak for WTI and Brent 

Increased activity levels in the U.S. and globally will tend to slow further inventory declines. Any sign that inventories may be about to start rising will slam the brakes on higher prices, and might even push them lower in the near term. As noted in my last article, there are also other factors that will tend to keep prices in their current range.

China’s economy had been roaring back while western economies were roiling with the surge of the virus, in the grip of a new outbreak. A recent Reuters article noted-

“Tens of millions of people have been in lockdown as some northern cities undergo mass testing amid worries that undetected infections could spread quickly during the Lunar New Year holiday, which is just weeks away.”

If this effect turns out to be prolonged, oil demand in China which largely sustained the oil price from dropping into the cellar in 2020, could falter.

Iran is expected to begin testing the current U.S. economic sanctions as the Biden administration has indicated a desire to reinstate the 2015 nuclear deal. Several million barrels a day could return to the oil market in fairly short order if the appeasement of the Iranian leadership becomes U.S. negotiating policy again.

Finally, the current OPEC+ restraint is going to be more difficult to maintain as prices lurch higher. Currently, 9.7-million BOPD is being withheld, plus the “gift” from Saudi Arabia, of another 1-million BOPD. At their next meeting, March-4th, 2021 will likely focus on restoring withheld production levels, to maintain market share.

In summary here, over the next few months, the market could receive mixed signals that slow the rate of oil’s continued increases. But, as the world economic picture brightens in the second half of the year, thanks to the pandemic gradually being beaten back by immunization, we think the trajectory for oil will continue higher. Some analysts, and notably Goldman Sachs are calling for Brent at $65 by the end of 2021. With the closeness of WTI to Brent these days, that could well put the primary shale benchmark over $60 this year.

 

Your takeaway

The trend now is bullish for companies extracting oil and gas, as the current backwardation scenario for oil futures contracts denotes. As noted though, the oil market is a dynamic place where events can change the course of the commodity in the space of a few minutes. I think oil-related stocks remain investible for those with a time horizon longer than a few months. Investors should look carefully at high-quality companies with low costs of production for entry points to establish new positions, or add to existing ones.

By David Messler for Oilprice.com 



23 Comments on "How Much Higher Can Oil Prices Go?"

  1. MyLegsDontHurtToday on Thu, 11th Feb 2021 1:02 pm 

    Two days ago I talk about supply chain problems related to micro-chips semi-conductor shortage. Well apparently, look at this jump at 7:25

    https://www.youtube.com/watch?v=egGn65vTszU

  2. IFeelGoodTodayItWontLast on Thu, 11th Feb 2021 1:15 pm 

    DC Vlog- The Vice President’s (Empty) House, and the neighbors the Clintons, Obamas, Ivanka & Bezo

    https://www.youtube.com/watch?v=AhBC9FbrO7I

  3. IFeelGoodTodayItWontLast on Thu, 11th Feb 2021 1:40 pm 

    StarvingLion : Translation: “North Ghawar is collapsing and will kill you”. Imagine when it abruptly goes from 2%/yr drop to >10%/yr. All out panic in the streets. Its guaranteed to happen between 2023-2025.

    ——————————————–

    My time frame is more 2022 – 2025

    System is way too complex to stay alive . I just bought sewing fabric this morning the selection is going. High end complex fabric used in sport clothing are gone.

  4. MyUselessAnalysis on Thu, 11th Feb 2021 4:10 pm 

    For some reasons, I am fascinated by facial expression, something new to me. It started six month ago. I usually turn the sound off on most video. He lost of lot of his ego and arrogance. I am probably seeing things are not there.

    https://www.youtube.com/watch?v=STYIGlGaSc0

    Barrack is what they called a charismatic leader. Of someone with a god like complex. Same with Bill Gated and Zuckberg (Face Book)

  5. makati1 on Thu, 11th Feb 2021 4:22 pm 

    It can go as high as it can, until it collapse’ the economy … again.

    Oilprice is just another ad for the oily market casino. Words meaning nothing. Mostly lies and guesses. If the Reset succeeds, the oily industry is toast. If it fails, the world will have learned it can do without so much of the oily stuff. Either way, the road for oil is … down.

  6. MyUselessComent on Thu, 11th Feb 2021 4:49 pm 

    As if peak oil was not enought.

    02-10-2021 Louisville, KY – Ice Storm and Icicle Playground

    https://www.youtube.com/watch?v=XVz70qPW4Qw

  7. PeopeDontSeemsToUndestandThisCivlisation on Thu, 11th Feb 2021 6:53 pm 

    I saw StarvingLion post about financialAmegeddon.

    https://financearmageddon.blogspot.com/2021/02/millions-of-americans-will-experience.html

    It will no work. The electrical grid wont hold much longer. Digital currency will not work either becaue the electical grid is easy to shutdown. We are all going back to a world without electricity and potable water

  8. PeopleDontSeemsToUndestandThisCivlisation on Thu, 11th Feb 2021 7:12 pm 

    The electrical grid is not that robust and easy to shutdown. You can also attack the cooler next to high power transformer with a riffle.

    Jump to 4:15

    https://www.youtube.com/watch?v=XVz70qPW4Qw

  9. FamousDrScanlon on Thu, 11th Feb 2021 7:13 pm 

    “I’m Donald Trump and I approved this cop killing”

  10. MyThoughtOnAnythingAndNothing on Thu, 11th Feb 2021 7:49 pm 

    Do you guys know the latest rumor ? Bidet is too sick to appear of TV or they have already executed him. People claim that if you compare Bidet picture before the inauguration with bidet picture now it is not that same man. I did not check this myself. I don’t know if they have arrested Mark Zuckerberg (Face Book) .

  11. FamousDrScanlon on Fri, 12th Feb 2021 12:50 am 

    MyThoughtOnAnythingAndNothing, your latest rumour is far too bland to get the attention of the MAGA-tard clan. Perhaps try adding some Jew space lazers, libtard paedophilia orgy’s at half-time during the Superbowl & Godzilla is real, a bleeding heart liberal & he’s been spotted crashing around the deep south smashing Robert E Lee & Jefferson Davis statues & feeding the homeless.

    https://youtu.be/nOTNQF-o_mQ
    (song written by a Canadian)

  12. MyThoughtOnAnythingAndNothing on Fri, 12th Feb 2021 1:54 am 

    Two days ago I talk about supply chain problems related to micro-chips semi-conductor shortage. Well apparently, look at this jump at 7:25

    https://www.youtube.com/watch?v=egGn65vTszU

    The remove empty stream at the beggining go to 5:25 instead of 7:25

  13. MyThoughtOnAnythingAndNothing on Fri, 12th Feb 2021 1:57 am 

    No I am not a superhuman geniuses. Sorry to disappoint you.

    https://www.youtube.com/watch?v=xvDuqW9SFT8

  14. MyThoughtOnAnythingAndNothing on Fri, 12th Feb 2021 9:57 am 

    OutcastPhilosopher

    Shell laid off 9000 employees in 2020. How many of them were petrol engineers?

    Exxon laid off 14,000 in 2020. Chevron laid off 6,000 in 2020.

    Oil is failing along with the ponzi scheme.

    ————————————–

    We 15 to 20 yesar too late to prepare for peakoil. It is done. Nothing can stop what is coming.

  15. MyThoughtOnAnythingAndNothing on Fri, 12th Feb 2021 10:29 am 

    you know it is over when you fired a guy over something stupid like this. You know you have to let it burn to the ground. No other choice

    Yoshiro Mori resigned as president of the Tokyo Olympic organizing committee over his comments suggesting that women talk too much.

    https://www.youtube.com/watch?v=TWsM3SwSGDY

    You cannot build anything with such stupid people. You wanted feminist, women empowerment. You are proud to have a minister de la condition feminine that is there to oppress man. Enjoy dying stupid piece of shit.

    The only help you will get from me are these shitty comments I put on this web site. Don’t expect more from me

  16. MyThoughtOnAnythingAndNothing on Fri, 12th Feb 2021 11:23 am 

    This I like. This assures us of a accelerated collapse. Most people only learn through pain and misery, especially women and man with feminines body shape and feminines way of thinking (also known as gay, lot of qay in position of power among whites western nation). Push destruction forward, stupid people only learn thought pain.

    Yellen Tells G-7 “Time To Go Big Is Now” In Her First Virtual Meeting

    https://www.zerohedge.com/economics/yellen-tells-g-7-time-go-big-now-her-first-virtual-meeting

  17. MyThoughtOnAnythingAndNothing on Fri, 12th Feb 2021 11:36 am 

    Biden Cancels Emergency Border Wall Funding As DHS Prepares To Admit 25,000 Migrants Waiting In Mexico

    https://www.zerohedge.com/political/biden-cancels-emergency-border-wall-funding-dhs-prepares-admit-25000-migrants-waiting

    This I also approved of. This assures us of a accelerated collapse. Most people only learn through pain and misery, especially women and man with feminines body shape and feminines way of thinking (also known as gay, lot of qay in position of power among whites western nation). Push destruction forward, stupid people only learn thought pain. This also means that the US will likely break up in smaller nations. All Good for me. Whites in the North, shit useless brown diversity in the South.

  18. MyThoughtOnAnythingAndNothing on Fri, 12th Feb 2021 11:49 am 

    You guy get it that woman are naturally stupid. It is needed for them to be stupid because it assures the continuation of the human race. You get that stupid people.

    Three fucking vaginas ( also known as women) that should stay home, cook, learn the art of sex (trained in using her three orifices to pleasure) never open her fucking mouth, only she is directly asked a question ans so on.

    https://www.youtube.com/watch?v=-j4CnkB1J0o

  19. MyThoughtOnAnythingAndNothing on Fri, 12th Feb 2021 1:00 pm 

    Interpret this the way you wants.

    https://www.youtube.com/watch?v=KSbL8l0IT1o

    1:02:34 to 1:04:00

  20. MyThoughtOnAnythingAndNothing on Fri, 12th Feb 2021 4:07 pm 

    The 73-year-old former ECB head will lead a new national unity government to replace Giuseppe Conte’s centre-left coalition that collapsed one month ago, leaving the country rudderless in an unprecedented crisis. Draghi will return to the presidential palace at midday on Saturday to be formally sworn in.

    https://www.zerohedge.com/markets/italian-bond-yields-hit-record-low-draghi-set-become-new-pm-soon-today

    ————————–

    Old people in position of leadership. I am starting to believe that people don’t want to participate in anything. They prefer death. I am not interested in participating to anything either. Maybe this is how a specie goes extinct. Old people wont let go and young people dont care. Young meaning 60 and younger

  21. MyThoughtOnAnythingAndNothing on Fri, 12th Feb 2021 4:15 pm 

    outcastphiloser : Unemployed Americans are now drug mules for the Sinoloa Cartel.

    Whites do not have what it takes to survive. Too many gay man amount the white race and too many feminist man looking for acceptance. The white race is done. I prefer to stay sit on my ass, no way I will lose my time working with a bunch a white metro sexual losers. More fun for me to watch this shit show from my lazy boy

    Legault cabinet is almost all made of metro sexual man. Same with trudeau and Macron. No time to lose with these losers

  22. FamousDrScanlon on Sat, 13th Feb 2021 12:55 am 

    Jeff Bezos Just Pulled a Rockefeller

    Both billionaires abandoned the masses when times got tough

    https://medium.com/surviving-tomorrow/jeff-bezos-just-pulled-a-rockefeller-13920fe403ca

    MAGA is a fucking joke. The notion of a billionaire, any billionaire, ending corruption & reducing inequality for the plebs is a kindergarten fantasy. There is no historical precedent for it & many examples of rich cocksuckers like Trump using the plebs & squeezing you for your last dime when you are most vulnerable (now).

    The Cosplay revolters are so fucking dumb & gullible it’s beyond belief. They thought they were repeating history, but they never bothered to read any of the history for themselves. Instead, they blindly took shit stain Trump’s word for who needed killing. If they had bothered to read the history for themselves they would see that the times the people won back their freedoms & ended corruption was when they killed the billionaires (kings,dictators,oligarchs) not followed them – dumb fucks.

    If we use history as a guide, only blood will bring back anything resembling the good ole days – like a honest days pay for a honest days work & reasonably priced non monopoly services like medical & post secondary education without a half dozen criminal, yet legal middle men.

    Whose blood? Well not your hated cultural war opponents who have the same amount of say as you do, which is sweet fuck all. You could slaughter every libtard pleb in the country & not one fucking thing would get better for you & yours. Why? Because like you they have no power, call no shots, make no laws. They’re doormats-tools-pawns just like you.

    No billionaire, elite or politician is going to bring back what you lost. Why? Because they are the ones that took it from you – duh. But hey, go stomp the fuck out of some faggots, pro abortionists & Wokesters…at least you’ll feel better for 5 minutes before you go back to being a stupid slave.

    The Only Thing, Historically, That’s Curbed Inequality: Catastrophe

    Plagues, revolutions, massive wars, collapsed states—these are what reliably reduce economic disparities.

    “Calls to make America great again hark back to a time when income inequality receded even as the economy boomed and the middle class expanded. Yet it is all too easy to forget just how deeply this newfound equality was rooted in the cataclysm of the world wars.

    The pressures of total war became a uniquely powerful catalyst of equalizing reform, spurring unionization, extensions of voting rights, and the creation of the welfare state. During and after wartime, aggressive government intervention in the private sector and disruptions to capital holdings wiped out upper-class wealth and funneled resources to workers; even in countries that escaped physical devastation and crippling inflation, marginal tax rates surged upward. Concentrated for the most part between 1914 and 1945, this “Great Compression” (as economists call it) of inequality took several more decades to fully run its course across the developed world until the 1970s and 1980s, when it stalled and began to go into reverse.

    This equalizing was a rare outcome in modern times but by no means unique over the long run of history. Inequality has been written into the DNA of civilization ever since humans first settled down to farm the land. Throughout history, only massive, violent shocks that upended the established order proved powerful enough to flatten disparities in income and wealth. They appeared in four different guises: mass-mobilization warfare, violent and transformative revolutions, state collapse, and catastrophic epidemics. Hundreds of millions perished in their wake, and by the time these crises had passed, the gap between rich and poor had shrunk.”

    https://www.theatlantic.com/business/archive/2017/02/scheidel-great-leveler-inequality-violence/517164/

    Any historical examples of a rich asshole swooping in & saving the common man? No. Why not? Because it’s a child’s fantasy. Never happened, never will.

    It’s so far fetched even Hollywood won’t make a movie out of such a dumb scenario.

    Space aliens? YES!

    A billionaire saving the common man? Bahahahaha…get the fuck outta here!

  23. Biden's hairplug on Sat, 13th Feb 2021 1:53 am 

    MyThoughtOnAnythingAndNothing, your latest rumour is far too bland to get the attention of the MAGA-tard clan. Perhaps try adding some Jew space lazers, libtard paedophilia orgy’s at half-time during the Superbowl & Godzilla is real, a bleeding heart liberal & he’s been spotted crashing around the deep south smashing Robert E Lee & Jefferson Davis statues & feeding the homeless.

    https://youtu.be/nOTNQF-o_mQ
    (song written by a Canadian)

    Well, well, well FamousDrApneaman and his half-baked attempts at Canadian Identitarianism, sprinkled with jewish peadophilia and libtard space lasers.

    In reality his time is up, but in his eyes this rumor is far too blond. His problem.

Leave a Reply

Your email address will not be published. Required fields are marked *