Oil Market Forecast - January 2021

Summary

This is the first issue of 2021 and so naturally the focus is very much on what to expect in the coming year. 2021 opens with a new President and a change in control in the Senate and so this seems an appropriate point to consider the political outlook in the US in the near term.

In this edition, we start by considering the US political outlook and then move on to an update of global crude oil supply and demand. We then look at storage and pricing before concluding with a summary of US onshore activity levels.

A few key points:

  • Based on their campaign commitments, the incoming President and the 117th Congress are likely to provide a markedly less supportive US oil investment environment than that seen in recent years. Policy changes are less likely to have a significant impact on global oil demand over the next decade or so.
  • Under current assumptions, the oil market returns to oversupply in the spring of 2021 flips to a supply deficit in 2022 which widens in 2023 and beyond.
  • Estimates of global crude stocks in 2021 support a further extension of OPEC+ production curbs through the second half of 2021.
  • Brent crude futures are now above $50/bbl through 2028 and WTI futures are above $50/bbl for the rest of the year.
  • US land oil rig counts have continued to rise, an increase which is expected to continue, albeit at a slower rate, for the rest of the year.

US Political Outlook

We start the year, not only with COVID-19 vaccines and extended OPEC+ supply curbs, but with a new President, one with very different views on the oil & gas industry than his predecessor. Until the Georgia senate run-off election, it seemed likely that the Republicans would hold the Senate, limiting President Biden’s capacity to implement his agenda. With the Democrats winning control of the Senate, he has much more scope to legislate, making this a good time to review his campaign commitments and examine some potential impacts on oil supply and demand.

President Biden made Climate and Energy one of the centerpieces of his campaign and his campaign website provides a lot of information on his philosophy and plans on entering office (i). There is a lot there and in keeping with the focus of this forecast, this analysis is focused on the policies that would impact oil supply and demand. Those impacts can be roughly split between impacts to global oil demand and those that impact US oil supply.

The actions that President Biden has proposed that would serve to impact global oil demand can be roughly divided into three groups – international engagement, investment in alternative energy and infrastructure and other measures that make hydrocarbons relatively less attractive.

In terms of international engagement, one of President Biden’s keynote commitments was to take the United States back into the Paris Agreement. Each signatory to this agreement is required to submit national plans to limit emissions every five years. The US had committed to reduce carbon dioxide emissions by 26%-28% of 2005 levels by 2025 (ii), but is not on track to meet this commitment, with the current policies defined as critically insufficient by the Carbon Action Tracker (iii). While we can expect the US decision to rejoin the Paris Agreement to result in policies that reduce carbon dioxide emissions, it is unlikely to have a significant impact on oil demand in the medium term as the initial focus will be on decarbonizing the power sector, something which is already underway and enjoying an economic tailwind.

Beyond returning to the Paris Agreement, President Biden has committed to convene a climate world summit within his first 100 days in office, to encourage other nations to make more ambitious national pledges. While such an event is of symbolic importance, cajoling nations to volunteer to binding emissions reductions has been notoriously difficult and, in any case, this would likely accelerate the decarbonization of the power sector, rather than impact oil demand in the near term.

There is a lot in the campaign document on the $2 trillion that will be made available for infrastructure and research in various energy related activities. This covers sectors like general infrastructure upgrades and climate change adaption, investment in the auto industry, transit, power, and buildings. There are some initiatives in that focus in the expansion of charging stations and research on battery technology, in addition to a commitment to switch federal / state and local government vehicle procurement to electric vehicles. While the outcome of additional battery research is uncertain, improved charging and a mandate to shift government procurement would probably increase the shift to electric vehicles (EV’s) and reduce global oil demand at the margin.

In addition to the changes outlined above, President Biden has indicated that he would implement tax, regulatory and economic measures to make hydrocarbon use relatively less attractive. These include developing more rigorous fuel economy standards “aimed at ensuring 100% of new sales for light and medium duty vehicles will be electrified”, coupled with an expansion or extension of the electrical vehicle tax credit, again measures that are designed to accelerate the shift to electrical vehicles. These tax credits are already in place, up to $7,500 for the first 200,000 EV’s or hybrids sold by each manufacturer and help to bridge the price gap between internal combustion and electrical vehicles. Expansion or extension of these programs is probably a pre-requisite to substantially increase EV penetration in the auto market, given the cost differentials. An acceleration in EV penetration in the US will result in a reduction in demand but given the size of the installed base of internal combustion engines and the level of current market share, this isn’t expected to have a significant impact on oil demand over the course if the next decade.

Finally, there were hints in the campaign policy document at what looked like a carbon tax. The document talks about the implementation of an enforcement mechanism “based on the principles that polluters must bear the full cost of the carbon pollution they are emitting”, coupled with a reference the imposition of carbon adjustment fees on carbon intensive goods from “countries that are failing to meet their climate and environmental obligations”. This approach would be positive, for the oil and gas industry, the global economy, and the climate as it will prioritize the most cost effective carbon dioxide abatement and climate change mitigation measures.

While the statements made on things that impact global oil demand were quite vague, several of the policy statements that would impact US oil supply were much more specific and received a lot of focus during his campaign. Again, these can be divided into three sets of measures, those that directly deny access, regulatory changes, and economic changes.
One of the highest profile commitments during the campaign was that a Biden administration would ban the permitting of wells on Federal lands. This is one of his most public and unequivocal commitments, but one that may be very hard to enact. The difficulties here can be divided into two categories.

The first is legal, as while there is precedent for a President to suspend leasing of new acreage and the President has the right to remove offshore areas from leasing altogether, but there is no clear basis to deny a company the right to drill on acreage it has already leased.

The second is a mixture of economic and political. Leasing land for oil and gas development generates a lot of revenue. The Interior Department’s Office of Natural Resources Revenue estimated that leasing on Federal Land generated $7.6 billion in tax revenue in 2020, down from nearly $12 billion in 2019 (iv). The Governor of New Mexico, Michelle Lujan Grisham who is a Democrat and close Biden ally, has already said she would ask for an exemption for any ban on leasing (v).

President Biden has also committed to permanently protect the Arctic National Wildlife Refuge, but as the results of the recent lease sale for tracts in the refuge demonstrated, it does not appear to need much protection, at least from oil companies.

Regulatory changes may have a more significant impact on the US industry. As expected, President Biden has signaled his intent to roll back the looser environmental rules introduced under President Trump. In itself, this is not necessarily a negative thing for the industry – the United States should not try to compete in global crude markets on the basis of the laxness of its environmental standards and raising environmental standards across the board should hopefully help address some of the animosity the industry currently attracts.

The campaign commitment that makes the least exciting headlines but have potentially the largest impact on the oil industry in the US, is the commitment to end fossil fuel subsidies in the tax code. Historically these subsidies were designed to incentivize US fossil fuel production, an objective clearly at odds with aims of President Biden and the 117th Congress. There are two provisions in particular where changes could have an adverse impact on the economics of the industry – the Intangible Drilling Cost Deduction and Percentage Depletion.

The Intangible Drilling Cost Deduction allows all costs associated with preparation and drilling of an oil or gas well, except the cost of the actual drilling equipment, to be expensed in the year incurred. Percentage Depletion allows the oil company to deduct a set percentage of its taxable income, rather than a percentage of the recoverable oil extracted. It has been estimated that elimination of both provisions would generate an additional $25.9 billion in government revenue, between 2017 and 2027 (vi).

Based on this review of his campaign commitments, President Biden appears opposed to the oil industry, opposition that runs beyond the need to combat climate change. Indeed, the components of policy that are aimed at combatting climate change are unlikely to have much impact on the oil industry for the next decade or so, as the cheapest and easiest way to achieve these targets is to decarbonize the power sector. The measures outlined to limit the supply of oil in the US are only likely to replace domestic production with foreign production, rather than reduce greenhouse gas emissions. The new political climate in the US is markedly less welcoming to investors in the oil industry, who would be wise to take President Biden at his word and start to rebalance their portfolios to provide more foreign oil asset exposure.

Oil Supply and Demand

Demand estimates from the latest IEA report (vii) show a further decline of 0.6 MMbbl/day for the first quarter of 2021, with demand now estimated at 94.3 MMbbl/day for the first quarter and 96.9 MMbbl/day for the full year. The latest EIA report (viii) has cut 0.4 MMbbl/day from its demand estimate for 2021, with current estimates at 97.8 MMbbl/day, but projects a rebound to 101.1 MMbbl/day, just short of (EIA) 2019 levels, in 2022. OPEC’s latest estimate (ix) is holding 2021 oil demand steady at 95.9 MMbbl/day.

New supply data is in line with last month’s forecast. The latest EIA data for October showed US oil production falling to 15.7 MMbbl/day from 16.2 MMbbl/day in September. US production is expected to average 16.5 MMbbl/day for 2020, a decline of 0.7 MMbbl/day from its 2019 average of 17.2 MMbbl/day. Our long term supply forecast does not see US production reaching 2019 levels again within the forecast period, which runs to 2035. The US onshore oil rig count continues to grow, reaching 268 units as of this report.

The 13th OPEC and non-OPEC ministerial meeting concluded on the 5th January, with a decision to maintain output at January levels through March 2021, with the exception of small increases (75 Mbbl/day) for Russia and Kazakhstan. Saudi Arabia subsequently announced a unilateral reduction in its own output of 1 MMbbl/day through March. Supply is expected to average 93.2 MMbbl/day through the first quarter of the year against average demand of 94.3 MMbbl/day, with oil market remaining in deficit for the first four months of 2021, as shown in Figure 1. May 2021 sees a steep jump in production as all OPEC and non-OPEC supply agreements expire, with the market then returning to deficit in 2022 and beyond.

Image

Figure 1 - Supply and Demand and Surplus Forecast

Even with the extended OPEC+ supply curbs, the market is expected to be in surplus for 2021 and in slight deficit in 2022 before moving into a sharp supply deficit in 2023 and beyond. OPEC have indicated they will continue to meet monthly and phase out production cuts as the market recovers.

The speed of the return of Libyan production to market was one of the supply surprises of 2020, but current forecasts now factor in a return to full capacity. One of the biggest areas of uncertainty on the supply side is the return of Iranian production to the international market. A new US administration opens the door to a return to the 2015 Iran nuclear deal and lifting of sanctions. It is estimated that Iran would be able to increase production by 1 MMbbl/day over current levels within 12 months, a surge in production that has not be incorporated in the current forecast.

Oil Storage

Global oil inventory drawdowns are estimated at 175 million barrels and 240 million barrels in the third and fourth quarter of 2020 respectively. While this may appear a large draw, it comes after an inventory build of 1.4 billion barrels in the first half of the year. Draws are forecast to continue at an average of 33 MMbbl per month for the first four months of 2021, as the OPEC+ supply curbs restrict supply and demand recovers.

Figure 2 shows global storage capacity and inventories. Global inventories peaked in May at 4.6 billion barrels, nearly half a billion barrels short of the estimated operational limit on global storage. They are expected to decline to about 4 billion barrels by April 2021 and then start to build again from the spring, back to 4.6 billion barrels by year end. From there, they are expected to fall sharply as recovering demand outstrips supply.

Image

Figure 2 - Global Oil Storage Chart

As Figure 2 shows, the market will require an extension of existing OPEC+ production curbs to prevent supply building back to last year’s peaks by the end of the year. There is also an increasingly urgent need invest in additional production capacity to safeguard supply beyond 2022, something that OPEC+ action could encourage if a tighter market yielded higher prices.

Oil Prices

While oil demand continues to face headwinds from the COVID-19 pandemic, oil prices have maintained the recovery that began at the end of last year. WTI has been above $50/bbl since January 6th and Brent crude is currently trading above $55/bbl.

As of the 19th January the Brent futures contract has been inverted and the WTI futures contract is inverted through the middle of the decade and normal beyond that, see Figure 3. The Brent curve is now above $50/bbl through 2028. The WTI futures contract remains above $50 for the remainder of 2020.

Image

Figure 3 - Brent and WTI Crude Oil Futures (January 19th, 2021)

The Dallas Federal Reserve (x) invited executives from 142 oil and gas firms to participate in a survey of their view of the spot price of WTI at the end of 2021. The results of this survey are shown in Figure 4. 65% of participants predicted the price would fall between $45/bbl - $55/bbl, with the median value in the $50/bbl - $55/bbl range, suggesting spot price productions are aligned with the current WTI futures curve.

Image

Figure 4 - Spot Price Predictions WTI End 2021

While the recovery in pricing provides some welcome relief to producers it should remembered that this price recovery is built on OPEC+ supply restraint, rather than fundamental supply and demand capacity. A failure to extend OPEC plus supply restraints from May is likely to result in a sharp deterioration in spot prices.

US Activity

The US land oil rig count closed 2020 at 248 units, having started the year at 648 and hitting a low of 158 in August. Land oil rig counts have continued their recovery into 2021, rising to 268 as of the 15th of January.

The consensus seems to be that the outlook for 2021 is a bit better than 2020, but not much. WTI crossed the $50 per barrel mark on the 6th of January and has managed to keep its head above that waterline in the intervening couple of weeks. However, it is worth noting that while the spot price is above $50 and there is reason to believe prices could rise through the year, around half of US oil production is hedged in the low 40’s. This, together with the need to repair balance sheets and return cash to investors, is likely to limit scope for investment for the rest of the year.

Estimates for 2021 US onshore activity range between 8,000 and 9,000 new wells for the year, against an estimated 7,400 for 2020. This equates to an average rig count of between 340 and 380 for the year, set against an average rig count of 329 for 2020. Historic and forecast rig counts are shown in Figure 5.

Image

Figure 5 - US Land Oil Rig Count


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Oil Market Forecast - January 2021

Summary

This is the first issue of 2021 and so naturally the focus is very much on what to expect in the coming year. 2021 opens with a new President and a change in control in the Senate and so this seems an appropriate point to consider the political outlook in the US in the near term.

In this edition, we start by considering the US political outlook and then move on to an update of global crude oil supply and demand. We then look at storage and pricing before concluding with a summary of US onshore activity levels.

A few key points:

  • Based on their campaign commitments, the incoming President and the 117th Congress are likely to provide a markedly less supportive US oil investment environment than that seen in recent years. Policy changes are less likely to have a significant impact on global oil demand over the next decade or so.
  • Under current assumptions, the oil market returns to oversupply in the spring of 2021 flips to a supply deficit in 2022 which widens in 2023 and beyond.
  • Estimates of global crude stocks in 2021 support a further extension of OPEC+ production curbs through the second half of 2021.
  • Brent crude futures are now above $50/bbl through 2028 and WTI futures are above $50/bbl for the rest of the year.
  • US land oil rig counts have continued to rise, an increase which is expected to continue, albeit at a slower rate, for the rest of the year.

US Political Outlook

We start the year, not only with COVID-19 vaccines and extended OPEC+ supply curbs, but with a new President, one with very different views on the oil & gas industry than his predecessor. Until the Georgia senate run-off election, it seemed likely that the Republicans would hold the Senate, limiting President Biden’s capacity to implement his agenda. With the Democrats winning control of the Senate, he has much more scope to legislate, making this a good time to review his campaign commitments and examine some potential impacts on oil supply and demand.

President Biden made Climate and Energy one of the centerpieces of his campaign and his campaign website provides a lot of information on his philosophy and plans on entering office (i). There is a lot there and in keeping with the focus of this forecast, this analysis is focused on the policies that would impact oil supply and demand. Those impacts can be roughly split between impacts to global oil demand and those that impact US oil supply.

The actions that President Biden has proposed that would serve to impact global oil demand can be roughly divided into three groups – international engagement, investment in alternative energy and infrastructure and other measures that make hydrocarbons relatively less attractive.

In terms of international engagement, one of President Biden’s keynote commitments was to take the United States back into the Paris Agreement. Each signatory to this agreement is required to submit national plans to limit emissions every five years. The US had committed to reduce carbon dioxide emissions by 26%-28% of 2005 levels by 2025 (ii), but is not on track to meet this commitment, with the current policies defined as critically insufficient by the Carbon Action Tracker (iii). While we can expect the US decision to rejoin the Paris Agreement to result in policies that reduce carbon dioxide emissions, it is unlikely to have a significant impact on oil demand in the medium term as the initial focus will be on decarbonizing the power sector, something which is already underway and enjoying an economic tailwind.

Beyond returning to the Paris Agreement, President Biden has committed to convene a climate world summit within his first 100 days in office, to encourage other nations to make more ambitious national pledges. While such an event is of symbolic importance, cajoling nations to volunteer to binding emissions reductions has been notoriously difficult and, in any case, this would likely accelerate the decarbonization of the power sector, rather than impact oil demand in the near term.

There is a lot in the campaign document on the $2 trillion that will be made available for infrastructure and research in various energy related activities. This covers sectors like general infrastructure upgrades and climate change adaption, investment in the auto industry, transit, power, and buildings. There are some initiatives in that focus in the expansion of charging stations and research on battery technology, in addition to a commitment to switch federal / state and local government vehicle procurement to electric vehicles. While the outcome of additional battery research is uncertain, improved charging and a mandate to shift government procurement would probably increase the shift to electric vehicles (EV’s) and reduce global oil demand at the margin.

In addition to the changes outlined above, President Biden has indicated that he would implement tax, regulatory and economic measures to make hydrocarbon use relatively less attractive. These include developing more rigorous fuel economy standards “aimed at ensuring 100% of new sales for light and medium duty vehicles will be electrified”, coupled with an expansion or extension of the electrical vehicle tax credit, again measures that are designed to accelerate the shift to electrical vehicles. These tax credits are already in place, up to $7,500 for the first 200,000 EV’s or hybrids sold by each manufacturer and help to bridge the price gap between internal combustion and electrical vehicles. Expansion or extension of these programs is probably a pre-requisite to substantially increase EV penetration in the auto market, given the cost differentials. An acceleration in EV penetration in the US will result in a reduction in demand but given the size of the installed base of internal combustion engines and the level of current market share, this isn’t expected to have a significant impact on oil demand over the course if the next decade.

Finally, there were hints in the campaign policy document at what looked like a carbon tax. The document talks about the implementation of an enforcement mechanism “based on the principles that polluters must bear the full cost of the carbon pollution they are emitting”, coupled with a reference the imposition of carbon adjustment fees on carbon intensive goods from “countries that are failing to meet their climate and environmental obligations”. This approach would be positive, for the oil and gas industry, the global economy, and the climate as it will prioritize the most cost effective carbon dioxide abatement and climate change mitigation measures.

While the statements made on things that impact global oil demand were quite vague, several of the policy statements that would impact US oil supply were much more specific and received a lot of focus during his campaign. Again, these can be divided into three sets of measures, those that directly deny access, regulatory changes, and economic changes.
One of the highest profile commitments during the campaign was that a Biden administration would ban the permitting of wells on Federal lands. This is one of his most public and unequivocal commitments, but one that may be very hard to enact. The difficulties here can be divided into two categories.

The first is legal, as while there is precedent for a President to suspend leasing of new acreage and the President has the right to remove offshore areas from leasing altogether, but there is no clear basis to deny a company the right to drill on acreage it has already leased.

The second is a mixture of economic and political. Leasing land for oil and gas development generates a lot of revenue. The Interior Department’s Office of Natural Resources Revenue estimated that leasing on Federal Land generated $7.6 billion in tax revenue in 2020, down from nearly $12 billion in 2019 (iv). The Governor of New Mexico, Michelle Lujan Grisham who is a Democrat and close Biden ally, has already said she would ask for an exemption for any ban on leasing (v).

President Biden has also committed to permanently protect the Arctic National Wildlife Refuge, but as the results of the recent lease sale for tracts in the refuge demonstrated, it does not appear to need much protection, at least from oil companies.

Regulatory changes may have a more significant impact on the US industry. As expected, President Biden has signaled his intent to roll back the looser environmental rules introduced under President Trump. In itself, this is not necessarily a negative thing for the industry – the United States should not try to compete in global crude markets on the basis of the laxness of its environmental standards and raising environmental standards across the board should hopefully help address some of the animosity the industry currently attracts.

The campaign commitment that makes the least exciting headlines but have potentially the largest impact on the oil industry in the US, is the commitment to end fossil fuel subsidies in the tax code. Historically these subsidies were designed to incentivize US fossil fuel production, an objective clearly at odds with aims of President Biden and the 117th Congress. There are two provisions in particular where changes could have an adverse impact on the economics of the industry – the Intangible Drilling Cost Deduction and Percentage Depletion.

The Intangible Drilling Cost Deduction allows all costs associated with preparation and drilling of an oil or gas well, except the cost of the actual drilling equipment, to be expensed in the year incurred. Percentage Depletion allows the oil company to deduct a set percentage of its taxable income, rather than a percentage of the recoverable oil extracted. It has been estimated that elimination of both provisions would generate an additional $25.9 billion in government revenue, between 2017 and 2027 (vi).

Based on this review of his campaign commitments, President Biden appears opposed to the oil industry, opposition that runs beyond the need to combat climate change. Indeed, the components of policy that are aimed at combatting climate change are unlikely to have much impact on the oil industry for the next decade or so, as the cheapest and easiest way to achieve these targets is to decarbonize the power sector. The measures outlined to limit the supply of oil in the US are only likely to replace domestic production with foreign production, rather than reduce greenhouse gas emissions. The new political climate in the US is markedly less welcoming to investors in the oil industry, who would be wise to take President Biden at his word and start to rebalance their portfolios to provide more foreign oil asset exposure.

Oil Supply and Demand

Demand estimates from the latest IEA report (vii) show a further decline of 0.6 MMbbl/day for the first quarter of 2021, with demand now estimated at 94.3 MMbbl/day for the first quarter and 96.9 MMbbl/day for the full year. The latest EIA report (viii) has cut 0.4 MMbbl/day from its demand estimate for 2021, with current estimates at 97.8 MMbbl/day, but projects a rebound to 101.1 MMbbl/day, just short of (EIA) 2019 levels, in 2022. OPEC’s latest estimate (ix) is holding 2021 oil demand steady at 95.9 MMbbl/day.

New supply data is in line with last month’s forecast. The latest EIA data for October showed US oil production falling to 15.7 MMbbl/day from 16.2 MMbbl/day in September. US production is expected to average 16.5 MMbbl/day for 2020, a decline of 0.7 MMbbl/day from its 2019 average of 17.2 MMbbl/day. Our long term supply forecast does not see US production reaching 2019 levels again within the forecast period, which runs to 2035. The US onshore oil rig count continues to grow, reaching 268 units as of this report.

The 13th OPEC and non-OPEC ministerial meeting concluded on the 5th January, with a decision to maintain output at January levels through March 2021, with the exception of small increases (75 Mbbl/day) for Russia and Kazakhstan. Saudi Arabia subsequently announced a unilateral reduction in its own output of 1 MMbbl/day through March. Supply is expected to average 93.2 MMbbl/day through the first quarter of the year against average demand of 94.3 MMbbl/day, with oil market remaining in deficit for the first four months of 2021, as shown in Figure 1. May 2021 sees a steep jump in production as all OPEC and non-OPEC supply agreements expire, with the market then returning to deficit in 2022 and beyond.

Image

Figure 1 - Supply and Demand and Surplus Forecast

Even with the extended OPEC+ supply curbs, the market is expected to be in surplus for 2021 and in slight deficit in 2022 before moving into a sharp supply deficit in 2023 and beyond. OPEC have indicated they will continue to meet monthly and phase out production cuts as the market recovers.

The speed of the return of Libyan production to market was one of the supply surprises of 2020, but current forecasts now factor in a return to full capacity. One of the biggest areas of uncertainty on the supply side is the return of Iranian production to the international market. A new US administration opens the door to a return to the 2015 Iran nuclear deal and lifting of sanctions. It is estimated that Iran would be able to increase production by 1 MMbbl/day over current levels within 12 months, a surge in production that has not be incorporated in the current forecast.

Oil Storage

Global oil inventory drawdowns are estimated at 175 million barrels and 240 million barrels in the third and fourth quarter of 2020 respectively. While this may appear a large draw, it comes after an inventory build of 1.4 billion barrels in the first half of the year. Draws are forecast to continue at an average of 33 MMbbl per month for the first four months of 2021, as the OPEC+ supply curbs restrict supply and demand recovers.

Figure 2 shows global storage capacity and inventories. Global inventories peaked in May at 4.6 billion barrels, nearly half a billion barrels short of the estimated operational limit on global storage. They are expected to decline to about 4 billion barrels by April 2021 and then start to build again from the spring, back to 4.6 billion barrels by year end. From there, they are expected to fall sharply as recovering demand outstrips supply.

Image

Figure 2 - Global Oil Storage Chart

As Figure 2 shows, the market will require an extension of existing OPEC+ production curbs to prevent supply building back to last year’s peaks by the end of the year. There is also an increasingly urgent need invest in additional production capacity to safeguard supply beyond 2022, something that OPEC+ action could encourage if a tighter market yielded higher prices.

Oil Prices

While oil demand continues to face headwinds from the COVID-19 pandemic, oil prices have maintained the recovery that began at the end of last year. WTI has been above $50/bbl since January 6th and Brent crude is currently trading above $55/bbl.

As of the 19th January the Brent futures contract has been inverted and the WTI futures contract is inverted through the middle of the decade and normal beyond that, see Figure 3. The Brent curve is now above $50/bbl through 2028. The WTI futures contract remains above $50 for the remainder of 2020.

Image

Figure 3 - Brent and WTI Crude Oil Futures (January 19th, 2021)

The Dallas Federal Reserve (x) invited executives from 142 oil and gas firms to participate in a survey of their view of the spot price of WTI at the end of 2021. The results of this survey are shown in Figure 4. 65% of participants predicted the price would fall between $45/bbl - $55/bbl, with the median value in the $50/bbl - $55/bbl range, suggesting spot price productions are aligned with the current WTI futures curve.

Image

Figure 4 - Spot Price Predictions WTI End 2021

While the recovery in pricing provides some welcome relief to producers it should remembered that this price recovery is built on OPEC+ supply restraint, rather than fundamental supply and demand capacity. A failure to extend OPEC plus supply restraints from May is likely to result in a sharp deterioration in spot prices.

US Activity

The US land oil rig count closed 2020 at 248 units, having started the year at 648 and hitting a low of 158 in August. Land oil rig counts have continued their recovery into 2021, rising to 268 as of the 15th of January.

The consensus seems to be that the outlook for 2021 is a bit better than 2020, but not much. WTI crossed the $50 per barrel mark on the 6th of January and has managed to keep its head above that waterline in the intervening couple of weeks. However, it is worth noting that while the spot price is above $50 and there is reason to believe prices could rise through the year, around half of US oil production is hedged in the low 40’s. This, together with the need to repair balance sheets and return cash to investors, is likely to limit scope for investment for the rest of the year.

Estimates for 2021 US onshore activity range between 8,000 and 9,000 new wells for the year, against an estimated 7,400 for 2020. This equates to an average rig count of between 340 and 380 for the year, set against an average rig count of 329 for 2020. Historic and forecast rig counts are shown in Figure 5.

Image

Figure 5 - US Land Oil Rig Count


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