Energy Prospectus

As I stress in all of my presentations, we are not drilling enough new wells to hold U.S. production flat. There was a surge in well completions in Q4, but that is over and I now expect U.S. oil production to decline month after month until the active drilling rig count is over 500. Last week the U.S. rig count was 378.

On January 19 Reuters reported U.S. oil output from major shale formations is expected to decline for the fourth straight month to about 7.52 million b/d in February, the lowest since June, the U.S. EIA said in a monthly forecast on Tuesday. Output at nearly all seven formations is expected to fall, driving an overall decline of about 90,000 b/d in February. Oil producers in the United States have begun to slowly add drilling rigs as prices recover but tepid demand recovery and investor pressure to reduce debt has kept companies from rushing to complete new wells. The biggest production decline in February is expected to come from the Bakken basin of North Dakota and Montana, where output is expected to drop for the fourth straight month, falling by about 20,000 b/d to about 1.19 million b/d, the lowest since August, the EIA data showed.

Production in the Eagle Ford and Anadarko basins are expected to decline by about 19,000 b/d each, with output in the Eagle Ford sliding below 1 million b/d for the first time since May. Meanwhile, output in the Permian basin of Texas and New Mexico, the biggest in the country, is expected to slide 13,000 b/d to 4.32 million b/d, the lowest level since September. Separately, the EIA projected U.S. natural gas output would decline for a third month in a row to 80.6 billion cubic feet per day (bcfd) in February. That would be the lowest since June 2020. Output from the big shale fields hit a monthly all-time high of 86.8 bcfd in November 2019. Output in Appalachia, the biggest U.S. shale gas formation, was also set to slip for a third month in a row in February to 33.8 bcfd. Output in the basin peaked at 34.3 bcfd in August 2020.

Demand side

On January 19 Reuters reported oil demand recovery will take a hit from a spike in new coronavirus cases before vaccine roll-outs and stimulus measures help in the second half of the year, the IEA said on Tuesday. "Border closures, social distancing measures and shutdowns...will continue to constrain fuel demand until vaccines are more widely distributed, most likely only by the second half of the year," it said in its monthly report. "This recovery mainly reflects the impact of fiscal and monetary support packages as well as the effectiveness of steps to resolve the pandemic," the IEA said. The emergence of new strains of the virus, renewed lockdowns in China and logistical hurdles facing vaccine roll-outs contributed to the IEA's gloomier outlook. Noting that an improvement to global oil demand went into reverse in December, the Paris-based watchdog lowered its forecast for the first quarter by 580,000 b/d and its outlook for 2021 by 300,000 b/d. Both supply and demand are on track for recovery this year, and efforts by top producers to balance the market by reining in output helped lower stockpiles of crude and oil products worldwide, though oil stocks remained stubbornly close to a May peak. Given an expected demand increase in the second half of the year, however, "much more oil is likely to be required". Cold Asian and European winters along with supply discipline by OPEC and its allies boosted crude prices, the IEA said, while the U.S. shale industry was expected to keep production flat. "If they stick to those plans, OPEC+ may start to reclaim the market share it has steadily lost to the U.S. and others since 2016."

On January 20 Bloomberg reported that China reduced its crude stockpiles by a record 1.3 million b/d in December as the nation imported less oil while processing large volumes, according to Bloomberg calculations based on government data. It was only the second monthly inventory draw last year and the biggest since Bloomberg started tracking the data in 2004.

On January 20 Reuters reported that Japan’s crude oil imports rose by 17.7% in December vs. November levels to 2.78 million b/d (down 17.5% y/y), according to its Ministry of Finance.