V-Day Reversal – February 20, 2022

Alaska North Slope Crude rose just 6 cents on Feb. 16 to close at $93.52. But this placid price action doesn’t tell the story of the week at all. ANS was at the forefront of an oil price correction, just as it was when oil prices hit $80 after Christmas and $90 in late January.

The downturn came on Valentine’s Day.

It was a Monday afternoon in Anchorage, which actually offered a three-day vacation weekend. Nice hotel rooms in a house with a high quality restaurant were hard to come by in Anchorage, including Alyeska Resort.

For many, February 14 was a day of romance, but for oil traders, the market was open. By the time ANS price came out for the day, traders who were long on oil in Houston and London could be excused for the celebration. West Texas Intermediate and Brent were up sharply. WTI jumped $2.36 to close at $95.56 and Brent jumped $2.04 to close at $96.48.

But ANS fell 73 cents on Valentine’s Day to close at $93.80, below WTI and Brent.

Red ink accelerated on February 15. ANS fell $2.74 to close at $93.46, WTI fell $3.39 to close at $92.07 and Brent fell $3.20 to close at 93.28 $.

WTI and Brent recovered on Feb. 16, posting bigger gains and higher prices than ANS. WTI jumped $1.59 to close at $93.66, and Brent jumped $1.53 to close at $94.81.

But at the start of trading on Feb. 17, as Petroleum News went to press, WTI and Brent had given up those gains, and more, amid choppy trading marked by several weak recovery attempts.

A recipe for volatility

Trading volatility has been wavering lately, as the specter of a Ukrainian border dispute nags the bulls, alternating with hopes that successful nuclear talks between the United States and Iran will lead to a lifting sanctions and a flood of new supplies around the world. Marlet.

These opposing waves heighten the intensity and the potential for immediacy.

As the Biden administration seeks increasingly desperate gas price cuts ahead of the U.S. midterm elections in the fall, in its quest to encourage foreign oil production, it seems more likely to make concessions to Iran.

On the other hand, Russia seems to be increasing its constitution of offensive means at the gates of Ukraine with the personnel and logistics necessary for mobilization. It will be difficult to maintain this state of readiness in the cold winter, and the muddy spring break-up looms as something of a deadline for deployment.

The long-term trend line for oil prices, however, is up as strong demand returns to the market post-pandemic, as evidenced by inventory drawdowns.

Meanwhile, supply is constrained by underinvestment and the struggle to meet production targets by some oil producers affiliated with the Organization of the Petroleum Exporting Countries and its allies, known as the of OPEC+.

Prices rose from less than $40 at the start of the pandemic to nearly $100 in February. Prices rose 17% in January alone.

Brent takes the lead

Since the start of the post-omicron rally in November, ANS has traded at a premium to Brent, and the spread has averaged more than a dollar before narrowing in recent weeks.

On February 14, then on February 16, Brent edged out ANS.

The ANS premium reflects heavy buying in Asian markets, particularly by China, which has diverted cargo from the Pacific that might otherwise have been peddled to the West Coast in competition with ANS. China had announced a mandate to acquire oil, gas and coal “at any price” for heating and to fuel the recovery from the pandemic.

As preparation for the Olympics winds down and China imposes strict shutdowns on cities due to omicron, robust buying in the Pacific may have waned. But that’s only one side of the picture.

Europe is now demanding oil for immediate delivery.

North Sea cargoes are in demand, with prices peaking on February 16 at $100.80 a barrel for the first time since 2014, according to S&P Global Platts, which publishes these prices under its “Dated Brent” banner. .

Dated Brent reflects the prices that traders are willing to pay in real time for cargoes that can be delivered to refineries.

The tightness of the market is further indicated by a prominent forward curve in the futures market, Bloomberg reported on Feb. 16.

“Brent’s six-month spread — the spread between the most immediate prices and those six months later — reached as high as $8.74 a barrel on Wednesday, according to data from ICE Futures Europe,” said said Bloomberg. “This is the largest data going back to 2007.”

European mobility made easy

After the omicron, mobility in Europe suffered as countries implemented travel restrictions to stop the spread of the virulent variant of COVID-19.

These restrictions fall.

From February 12, France will allow fully vaccinated travelers from Britain to enter without showing a negative test result before departure.

As recently as February 3, France imposed restrictions on travel from Britain, saying passengers over the age of 18 would only be considered fully vaccinated if they had completed their first approved course of full vaccination in the past nine months, or if they had received COVID. -19 vaccine booster, according to Eurostar. Vaccinated travelers then had to present proof of a negative PCR or antigen test taken within 24 hours of their departure from the UK.

Unvaccinated passengers will have to demonstrate a “compelling reason” to visit France, subject to a 10-day quarantine imposed by the police.

Britain has also lifted travel restrictions. All testing measures for fully vaccinated travelers arriving in the UK were lifted on February 11.

Travelers who are not fully vaccinated will only need to take a pre-departure test and a PCR test no later than day 2 after arriving in the UK. The requirement to self-isolate and take a test on Day 8 has been lifted.

Since January 22, Switzerland has allowed fully vaccinated travelers from the UK to enter the country without proof of a negative PCR or antigen test.

Travelers who can show recent recovery from COVID-19 will also be able to enter Switzerland without proof of a negative pre-travel test.

The supercycle could boost oil from tight reservoirs

Up to 2.2 million barrels per day of tight oil in the United States could be released in the event of a supercycle – with oil prices remaining around or above $100 a barrel – driven by growing demand and a continued tightening of supply, Rystad Energy said in a Feb. Release.

Production in the main producing regions of the United States – the Permian, Eagle Ford, Niobrara, Bakken and Anadarko – in the fourth quarter of 2021 reached 7.7 million bpd, Rystad said, adding that it expects that production exceeds the 2019 peak of 8.1 million bpd in the second quarter of 2022 and expand further if a supercycle materializes.

If oil prices reach and stay around $100 a barrel, the regions’ total production will reach 9.9 million bpd by Q4 2023, an increase of 2.2 million bpd from Q4 2021 , the consultancy said.

Soaring prices are prompting operators to increase production as supply from sources outside the United States remains tight, he said.

“While high prices would theoretically trigger a tight oil production boom, acute supply chain bottlenecks, a lag between price signals and its impact on production, and disruptions related to winter weather conditions will slow growth,” said Rystad shale manager Artem Abramov. research. “Added to this are forecasts that spot sand prices will reach a range of $50-$70 per ton – a level unprecedented in the modern history of the industry – which will hit operators’ wallets.”

A price range between $70 and $100 per barrel would trigger a significant production increase in the fourth quarter of 2022, while an extended run of $90 to $100 per barrel would further increase drilling activity already recovering from the second. quarter of 2022, Rystad said.

“Beyond 2023, $100 WTI will allow the industry to achieve average annual growth of approximately 960,000 bpd, from the fourth quarter of 2021 through the fourth quarter of 2025,” Rystad said. “A $70 world will still allow for a sustainable growth cycle, but the average annual rate will be limited to around 560,000 bpd.”

In a $100 a barrel scenario, a gradual rollout of additional rigs by private operators and independent public producers would materialize from the second quarter of 2022, he said.

“A fundamental shift in public E&P operating philosophy is emerging, with many responding to a global call for tight oil growth,” Rystad said. “Recent communications from ExxonMobil and Chevron on their ambitious growth plans for the Permian reaffirm this trend.”

Rystad said a marked shift is taking place in the Permian and some other basins, with industry sentiment returning to momentum.

Various supply chain bottlenecks may delay the resumption of business, “but they will not act as a complete impediment as the industry has repeatedly demonstrated that all of these bottlenecks are resolved at time,” he said.

For the rest of the Lower 48 conventional and condensate production in the shale gas regions, excluding the Gulf of Mexico, oil production stabilized between 1.7 and 1.8 million bpd, said Rystad, adding that a recovery to 1.9 million bpd over the next four years is possible in a favorable price environment.

“Against this backdrop, pre-Covid-19 peak oil production of 10.4 million bpd would already be within reach by late 2022 or early 2023,” Rystad said.

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