The OPEC+ impasse has taken the wind out of oil bulls’ sails this week amid speculation that the current production cuts agreement could collapse. And sure enough, Brent and WTI were on track for another bad day at the office yesterday after falling to their lowest level in about three weeks. However, a bullish EIA stock report helped the oil market rebound into the black.
US crude inventories declined for the seventh consecutive week, dropping by a bigger-than-expected 6.9 million bbls to now stand 5.8% below the five-year average. This included a 614,000 bbl decline at the Cushing hub where stocks fell below 40 million for the first time since March 2020. Meanwhile, gasoline stockpiles drew by a hefty 6 million bbls last week in what was the biggest drop since the end of February. Demand for the fuel surged by 870,000 bpd from the previous week, and in doing so scrambled past the psychologically significant 10 mbpd mark for the first time since EIA records began in 1991. The jump in gasoline consumption helped propel total product supplied, a proxy for demand, above 21 mbpd for the first time since the pandemic began.
Clearly, US oil markets are tight. However, the ongoing drawdown in US oil inventories will not prevent oil from falling below $70/bbl. The only way to prevent further losses is for the threat of an OPEC+ price war to be contained. Every day that goes by without a deal increases the risk that members will produce more without the blessing of the group. The OPEC+ conflict must be resolved if bets of $80 oil are to come to fruition.
Searching for supply growth
As mentioned earlier this week, US shale producers are showing no desire to chase supply growth. Instead, they are using the windfall from rising oil prices to rebuild their balance sheets, paying down debt and returning cash to shareholders. But while US shale players are sticking to their output discipline, it’s a very different story north of the border. Canada’s oil sands production has come roaring back, and according to IHS Markit, has fully recovered from last year’s Covid-19 shock.
Canadian oil producers are benefitting from higher demand for crude oil feedstock, driven by significant growth in the US and Canadian economies. What’s more, Canada’s oil sector is also enjoying the perks from elevated prices. Western Canadian Select at Hardisty exceeded $60/bbl on July 2 for the first time in almost 7 years. Since the start of year, the price of Western Canadian Select has soared more than 75% which compares favourably to the gains registered by Brent and WTI. The upshot is that Canadian producers are awash in cash flow again. Looking ahead to the remainder of the year, the IEA projects Canadian production levels will increase to a record high in the second half of 2021, so much so that it will be the leading source of non-OPEC supply growth this year.
And it is not alone in going full steam ahead with its oil ventures. For one, Brazil’s oil boom continues unabated. Latin America’s biggest oil producer has shown impressive resilience to the coronavirus pandemic. Despite being the third most affected country globally, by May 2021 pre-salt oil production was just under 2.7 mbpd, a notable 14% increase compared to the same period a year earlier. All the while, state-owned Petrobras claims its pre-salt operations have a prospective breakeven price of an extremely low $19/bbl. This makes those assets highly profitable at prevailing oil prices. No surprise, then, that the IEA forecasts Brazil’s oil production will average 3.23 mbpd in 2H21, up from 3.04 mbpd in the first half of the year.
Fellow non-OPEC producer Norway is also pumping with impressive gusto. The country’s oil production exceeded official expectations in May for the second straight month. The major contributor to growth was the Johan Sverdrup field which recently hit its revised target of 535,000 bpd, according to loading schedules. Norway’s oil output is forecast to continue to grow in the coming months as new fields come online and ramp up production, including the much-delayed Martin Linge field. Echoing this sentiment is the IEA which expected Norway’s oil output to average 2.18 mbpd in 2H21 compared to 2.06 mbpd in 1H21.
As OPEC and its non-OPEC allies dither over agreeing to a new production deal, rival producers are keeping their foot planted on the production pedal. Even so, the anticipated supply growth from non-OPEC producers through the rest of the year will come nowhere close to matching forecasts for significantly stronger demand over the summer months. This widening supply and demand gap puts the oil market at risk of overtightening and should give the OPEC+ leadership ample motivation to resolve their squabble. Or so you would think.