Traders Bet That Oil at $100 Is a Question of When, Not If

January 19, 2022

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by Andrew Janes and Serene Cheong (Bloomberg/Yahoo!) ... Global benchmark Brent crude has jumped 25% to around $88 a barrel since the end of November. Some in the market now think it’s now a question of when -- not if -- oil hits triple digits, somewhere it hasn’t been since 2014.

Goldman Sachs Group Inc. said this week it sees prices reaching $100 in the third quarter as consumption surprises to the upside. The cost of $100 call options for Brent’s December contract also surged to a record on Wednesday.

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U.S. shale is coming back and has the potential to restrain the rally, while all eyes are on China to see if omicron can breach Covid-19 defenses that have so far proved mostly impenetrable.

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With the exception of a major virus outbreak in China (see below) or a scary new strain emerging, it’s hard to see a demand reversal.

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Shares of U.S. energy companies are surging as oil rallies, but the big question -- which will be critical in determining if crude gets to three figures -- is whether shale drillers will use the extra cash to boost production this year.

China Virus Wildcard

So far China’s zero-Covid policy featuring draconian city-wide lockdowns has succeeded in preventing a wider outbreak and a material hit to oil demand in the world’s biggest importer. But the approach will be tested by Lunar New Year celebrations -- when many Chinese traditionally return to their home towns -- that are less than two weeks away, as well as the Winter Olympics in and around Beijing from Feb. 4 to 20. READ MORE

EIA expects U.S. fossil fuel production to reach new highs in 2023 (U.S. Department of Energy)

Global oil supplies could experience 'massive' rise in 2022, IEA says (Politico)

Oil Demand to Exceed Pre-Covid Levels in 2022, IEA Says: Paris-based agency says total demand this year should stand at 99.7 million barrels a day (Wall Street Journal)

OILING UP: (Politico's Morning Energy)

Russian invasion of Ukraine could trigger $8 gas, exposing addiction to oil (Houston Chronicle)

As oil nears $100 a barrel, U.S. drillers get busy in costly shale basins (Reuters)

Why High Gasoline Prices Could Stick Around for a While: Demand for oil is outstripping supply, with little promise of relief ahead (Wall Street Journal)

Oil’s relentless climb toward $100 wreaks havoc on company profits (Bloomberg)

Consumers face years of high energy prices, Big Oil CEOs warn (Reuters)

Bumper Profits Are Sparking A Backlash Against Big Oil (OilPrice.com)

Oil’s Spectacular Covid Crash Set the World Up for $100 Crude -- The energy industry cut back during the pandemic, paving the way for a runaway rally that has huge implications for the global economy. (Bloomberg)

As Oil Nears $100, Saudis Snub U.S., Stick to Russian Pact Amid Ukraine Crisis -- Saudi officials say they won’t pump more oil to ease prices, despite U.S. calls for more crude (Wall Street Journal)

Why All This Breast-Beating about Faltering Petroleum Refineries? Wouldn’t It Be Better if They Stop Producing Fossil Fuels and Move to Renewables? (Advanced Biofuels USA)

Excerpt from Politico's Morning Energy: OILING UP: Global oil supplies could see a major upshoot this year as OPEC+ increases its output and renewables trail in meeting global energy demand, Toril Bosoni, the International Energy Agency’s head of oil market analysis, said Thursday. IEA is projecting possible increases of 6 million barrels a day of oil production, potentially cooling prices that have become a political cudgel against the Biden administration, Pro’s Ben Lefebvre reports. READ MORE

Excerpt from Reuters: Some executives say current high prices and relatively low service costs make production economics the best in years. Firms are buying U.S. oil, pipeline and gas processing rivals in a bet that higher prices will more than cover rising costs of labor and equipment.

"Drilling economics today are better than they’ve ever been since the shale revolution started," said Chris Wright, chief executive officer of Liberty Oilfield Services (LBRT.N). Closely held companies, in particular, are accelerating output, he said.

New activity is stirring in secondary oilfields like Colorado's DJ Basin, Wyoming's Powder River, Louisiana's Haynesville and North Dakota's Bakken shale, which last year lost its spot as the second largest U.S. oil producing region.

(For a graphic of oil production in secondary basins, click here: https://graphics.reuters.com/USA-OIL/PRODUCTION/lgvdwxxeopo/)

ACQUISITIONS SPUR OUTPUT

Spending budgets among U.S. independent producers are up 13% over a year ago, according to analysts at Cowen. Among secondary fields, the natural gas-rich Haynesville is among the only to fully recover output from the 2020 oil-price crash. Other shale fields, including the second-largest producing oilfield, are adding to holdings and rigs.

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Still, outside of Haynesville and the Permian, oilfields lag their peak production. Bakken producer Hess Corp. aims to increase its overall production by 12% to 15% this year, driven by output in the Bakken and Guyana. Chevron plans to boost its Permian shale output 10% and Exxon said it could deliver 25% more oil and gas from its Permian holdings.

In the Bakken, oil output is around 1.2 million barrels per day (bpd), below its 1.52 million bpd late 2019 peak. In the Eagle Ford shale of South Texas, oil is averaging 1.1 million bpd, off the peak 1.7 million bpd in early 2015.

U.S. producers have been adding three rigs per week, but they would need to add 11 rigs per week to hold production at current levels, according to Mizuho analysts.

Ron Ness, head of trade group North Dakota Petroleum Council, said supply chain challenges could limit production gains this year, as could investors demanding higher returns.

"Unless $100 plus oil changes the investment mindset toward growth, I'm not sure we will see 1.5 million barrels per day again" in the Bakken, he said. READ MORE

Excerpts from Bloomberg: An entire industry has gone from being written off as a wounded dinosaur and shunned by investors to getting pressure from the U.S. President to step up and save the economic recovery.

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A world that’s supposed to be learning to live without fossils fuels has witnessed the spectacle of White House officials calling on OPEC+ to boost oil production while attending the COP26 climate conference in Glasgow.

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BP Plc CEO Bernard Looney openly speculated that global oil demand may never return to pre-pandemic levels. Shell followed his lead, declaring that it would start to shrink its crude production. By early 2021, all three of Europe’s oil majors had promised to make a much faster pivot to clean energy and achieve net-zero carbon emissions by 2050.

“Companies are focused more on the energy systems of the future, not the traditional energy system of oil and gas,” said Shell CEO Ben van Beurden.

The immediate consequence of this was less investment going into new resources, and the impact wasn’t only felt in Europe. From Nigeria to Angola and Equatorial Guinea, countries whose oil industries were developed largely by the global supermajors began to suffer steep production declines at their aging fields.

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“We’ve changed our model and it’s a contract with our shareholders,” said Pioneer’s Sheffield. After averaging 16% annual production growth from 2016 to 2019, the largest Permian-basin producer is now “only going to grow 5% a year,” he said.

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Major oil companies are making mega profits again, but say their priority is to return cash to investors rather than boost spending on new fields.

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The surging cost of oil and gas is contributing to a broader jump in inflation and panicking world leaders, who just months ago signed a climate deal pledging to quicken the transition away from fossil fuels. While higher prices for traditional energy should spur investment in renewables, many politicians have demanded that OPEC+ and other producers pump more now.

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In these circumstances “$100 is certainly within the realm of what we could see in the next few months,” said Chevron CEO Mike Wirth. READ MORE