This is a Big Deal - Jan 18

[dan_s]

As I have posted here many times, I believe OPEC+ (including Russia) has much less spare production capacity than they are telling the market. If Russia has reached max-capacity, it is a BIG DEAL. 14 countries in OPEC+ are unable to produce up to their official quotas.
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(Bloomberg) -- Russia may be able to deliver only about
half of its scheduled increases in crude production over the
next six months, joining the ranks of OPEC+ nations that are
struggling to ramp up even as fuel demand rebounds from the
pandemic.
With crude already trading above $85 a barrel in London,
the outlook for Russian output leaves the global market looking
even tighter than expected. It risks amplifying the energy-price
surge that’s contributing to the highest inflation in decades.
In the booming Asian physical market, Russian premium ESPO
crude -- a favorite grade among Chinese processors -- has
already surged to the highest since November amid declining
inventories in China, according to traders.
The OPEC+ member is supposed to be adding 100,000 barrels a
day of crude to the market each month, but growth ground to a
halt in December. Due to a decline in drilling last year, most
analysts polled by Bloomberg News expect Russia’s actual monthly
increases can go no higher than 60,000 barrels a day in the
first half of 2022.
“We have a hard time seeing Russian suppliers maintaining
100,000 barrels-a-day production increases each month for the
next six months,” Bank of America Corp. analysts Karen Kostanyan
and Ekaterina Smyk told Bloomberg.

The Organization of Petroleum Exporting Countries and its
allies are in the process of restoring output halted during the
pandemic. The coalition is supposed to pump an additional
400,000 barrels a day each month, yet the actual production
increases have fallen short due to factors ranging from internal
unrest to insufficient long-term investment in a number of
countries.
Last month, OPEC boosted output by just 90,000 barrels a
day. Russia’s production started stagnating in November, and in
December it dropped below its OPEC+ quota for crude, according
to Bloomberg estimates based on Energy Ministry statistics. The
first days of January brought a less than 1% rise in the
country’s total petroleum output, which includes crude and a
light oil called condensate that is extracted from natural gas,
according to Interfax.
Russia’s top oil official, Deputy Prime Minister Alexander
Novak, has said the country will continue to hit its production
targets. Output of crude will rise to 10.1 million barrels a day
this month, he told the Tass news agency last week. That would
be in line with its OPEC+ quota and an increase of about 100,000
barrels a day from December.

Inflationary Pressure

If OPEC+ continues to struggle to hit its production
targets, there may be wider economic consequences. The recovery
in oil demand has remained robust as the Omicron strain of the
coronavirus has a milder effect on the global economy than
anticipated.
Brent crude, the international benchmark, has jumped more
than 10% since the start of the year and may have further to go,
according to Vitol Group. High energy prices are a significant
contributor to rising inflation and the White House has
consistently applied pressure on OPEC+ to boost supply and help
curb fuel costs.
Through most of 2021, Russia maintained fairly consistent
monthly production increases as it restored capacity idled in
the early stages of the Covid-19 pandemic. By November, the
revival started to run out of steam.
The spread of active, idle and shut-down Russian production
wells returned to pre-pandemic levels, indicating that the
industry had nearly fully deployed its spare capacity. That was
later confirmed by statements from the country’s largest
producers, Rosneft PJSC, Lukoil PJSC and Gazprom Neft PJSC.

Last year, Russian oil majors were in no hurry to boost
their production drilling, a move that would have enabled new
capacity to be brought onstream in late 2021 and in 2022. By the
end of November, overall drilling rates for the year were down
4.5% compared to the same period in 2020, according to Interfax
data based on the Energy Ministry’s CDU-TEK figures.
The Russian oil industry has been in wait-and-see mode due
to the uncertainty around the effect of the coronavirus on
demand, according to analysts from Bank of America and Vygon
Consulting. Several companies also capped production last year
after some of their projects lost tax breaks.
These producers “are rather unwilling to invest” in those
projects until they find out whether the Finance Ministry will
bring some of those incentives back, said Daria Melnik, a senior
analyst at Oslo-based consultant Rystad Energy A/S. The
government is ready to consider some tax breaks from 2023 at the
earliest, provided that the OPEC+ output cuts end this year as
planned, Deputy Finance Minister Alexey Sazanov told Bloomberg
last month.
This year, most major Russian producers plan to increase
capital expenditure, varying from a boost of around 10% at
Gazprom Neft to some 20% at Rosneft. Tatneft PJSC expects its
2022 upstream investments to grow as much as three to four times
compared with last year.
This increase in drilling will eventually deliver higher
output, but most of the gains will come after 2022. The new
wells will generate only a modest increase this year, according
to analysts from Rystad Energy to Renaissance Capital.
Rosneft, which accounts for a significant part of total
spending in the Russian oil industry, “is now channeling money
into its Vostok Oil project, it’s the producer’s main priority,”
said Melnik. The company plans to start large-scale crude
production at the Arctic project in 2024.
Gazprom Neft’s Zima cluster of new fields in Western
Siberia, which analysts from Renaissance Capital and Rystad
Energy name as a source of new crude for the producer in 2022,
will reach peak output in 2024. Its Arctic oil-rims project is
already producing, but will ramp up gradually, doubling over
five years.
This explains why most observers see Russia falling short
of its targets in 2021. “We don’t expect Russia to raise its
output by 100,000 barrels per day on any month this year,” said
Melnik.

[dan_s]

BofA Equity Research Note

Brent at the highest level since 2014
Towards the end of last year the single issue dominating discussions on the sector
outlook was the pace of crude additions from OPEC+, and increasing focus on capacity
constraints across member countries. But the rebound since the start of the year has
taken spot oil prices to the highest level since 2014 and lifted the back end of the curve
over $65. The significance of this recovery, in our view, is exemplified by one issue: oil
prices are being held by deliberate and pro-active intervention from Saudi Arabia. In our
recent 2022 outlook, we laid out a number of issues we believe can define sector
performance including: capital discipline, cash returns, and valuation transparency.
But the single biggest issue in our view, is that when not challenged for market share
Saudi can lead efforts to ‘regulate’ oil markets, in concert with Russia and in cooperation
with a number of other OPEC and non-OPEC countries. With this backdrop, we believe
2022 can be the year the market is forced to reassess what represents a sustainable
long term oil price.

What do US oils look like at $70 Brent? 40%-70% upside < My take is that Brent will average over $85/bbl 2022 & 2023
Increasingly we see two issues dominating the oil debate – spare production capacity
and the pace of demand recovery. Per our Russian team, Russia may only have ~100,000
bpd available as additional production capacity vs January production levels. Saudi
retains >1mm bpd of theoretical spare capacity. The single biggest share of total
theoretical spare capacity within all OPEC countries, including Iran. However with
absolute OPEC spare capacity at ~3.87mm bpd (as of Dec 2021), the impact of a full
recovery in jet demand estimated at 3mm bpd clearly points to a tightening market that
underpins BofA’s view of $95 oil in 2Q22, and leaves upside risks to 2H22 expectations
(currently $75-$85). Of course none of this occurs in a straight line noting seasonal risks
and possible return of Iranian barrels.

Over the weekend comments from Saudi Arabian oil minister, Prince Abdulaziz bin
Salman suggests Saudi is unconcerned with oil at current levels. We agree – per our
commodity team, oil as a percent of GDP is still $30-$40 below levels that may be
perceived as a to crimp demand. So, recapping the single most important point of our
year ahead strategy outlook, our thesis for the US & Canadian oils is relatively simple:
what does the sector look like at BofA’s current base case ($60 Brent) and more
importantly, at $70 long dated Brent. The simple answer is upside of 40%-90%.