The oil price ‘super’ cycle rhetoric is finally getting a bit of a reality check. The negative sentiment was kicked off by doubts in Europe over the AstraZeneca vaccine, and was ossified by the nearly 2.4 million-barrel crude build in US crude inventories.
Crude stocks have been swelling for the past four weeks, largely as a post-mortem effect of the February freeze in Texas that slashed the demand for oil input into refineries.
In terms of the inventory builds, these will take time to clear out, but the US appears to be moving in the right direction with its vaccine roll-outs and lifting restrictions across many states that should spur economic recovery and end-user oil consumption.
Addressing the negative vaccine sentiment, the markets are on a waiting mode for news as today the European Medicines Agency said it will give more definitive guidance on the AstraZeneca vaccine, beyond the Tuesday statement that it “does more good than harm”.
Even if the AstraZeneca vaccine recovers public confidence, this will likely not be the last inoculation issue to arise as countries race to vaccinate as many people as possible all while new mutations are constantly being discovered.
So far we see more downside risk to vaccine roll-out but are overall optimistic in terms of vaccine production and most of the developed world reaching 50% vaccination by in 2H21.
Another blow to oil prices was delivered in a few quick minutes with the release of the IEA monthly oil report, which said that an oil price super-cycle is unlikely to materialize in full given the bountiful supply ready to fill any gaps.
At least in the short-term, we don’t expect oil prices to be catapulted into triple digits due to pandemic-induced capex cuts.
Even if the forecasted 5-6 million bpd of oil demand does materialize through year-end, we believe OPEC+ is well-positioned to fill the supply need, having about 9.5 million bpd of crude production that could theoretically be activated and produced within just months.
This spare capacity figure does not include countries like Iran and Venezuela, which have their own spare capacity, but are blocked by sanctions.
Nevertheless, even though prices have been declining for five straight days, this is still a small blip in the seemingly endless upwards trajectory since the beginning of January 2021, fueled by US stimulus hopes and extreme OPEC+ supply restraint.
Looking at the US production, which is untied to restrictions, we are seeing a growing divergence within the US shale strategy, with the supermajors practicing extreme fiscal discipline and only keeping spending at levels needed to bring on drilled but uncompleted (DUC) well inventories and conservative rig programs.
But on the other end of the spectrum is the private operators, incentivized by $60 per barrel WTI, who will drive rig additions in 2021 and production growth from 2022.