Vantage Point Advisors’ Energy Blog December 2020

New Math? 

Shale Oil / Covid-19 = OPEC+

According to Bloomberg News,[1] “A devastating global pandemic and a reckoning with Wall Street appear to have broken the resolve of the shale wildcatters who turned the U.S. into the world’s biggest oil producer.”  By the end of 2021, U.S. shale oil production is expected to be approximately 11 million barrels a day, about the same as it is now, according to forecasters IHS Markit, Rystad Energy, Enverus, and the U.S. Energy Information Administration.  This diminished growth, current and expected, has caused the reversion of the US to be a price-taker from OPEC and other large producers like Russia and Mexico, comprising the OPEC+ group.

Pioneer CEO Scott Sheffield recently said, “I see no more growth until 2022, 2023, and it will be very, very light in regard to the U.S. shale industry ever growing again.” Since June, benchmark U.S. oil prices have been remarkably stable, hovering around $40 a barrel, and that’s how OPEC likes it.  In recent news, the oil market pushed prices above $45 a barrel for the first time since March due to the third drug company, AstraZeneca, showing promising results from a trial of its coronavirus vaccine.[2]

Now, when the cartel meets in a virtual gathering this week, and the broader OPEC+ alliance on December 3rd, they’ll probably be more focused on the pandemic’s impact on fuel consumption and the next phase of its production policy.  OPEC’s crude output jumped in November by 750,000 barrels per day (BPD), the fifth consecutive increase in the cartel’s production, the monthly Reuters survey showed on Monday.[3]

According to CNBC,[4] OPEC members will likely delay an output hike at its meeting this week as they weigh positive vaccine news against new coronavirus lockdowns and resurgent shale drilling in the U.S.  A planned 2 million BPD January production ramp-up looks set to be delayed, according to market consensus, with analysts differing on whether that would be for three months or six months.

A delay appears to be reflected in current oil prices – if OPEC increases production, oil prices will be expected to fall as supply increases.  According to Capital Economics’ Chief Commodities Economist, Caroline Bain, by the end of 2021 oil prices are expected to be around $60 per barrel, higher than the futures prices shown below.

WTI Strip Prices Increase

Over the past month, futures prices for the WTI contract increased given optimism over the success of announced vaccines for the Covid-19 virus.

Oil Price Outlook

The price distribution below shows the crude oil spot price on December 1, 2020, as well as the predicted crude oil prices based on options and futures markets.  The blue lines are within one standard deviation (σ) of the mean, and the red lines are within two standard deviations.

 

Based on these current prices, the markets indicate that there is a 68% chance that oil prices will range from $36.00 and $55.50 per barrel in mid-March 2021.  Likewise, there is about a 95% chance that prices will be between $22.50 and $72.05.  By mid-May 2021, the one standard deviation (1σ) price range is $35.00 to $58.50 per barrel, and the two-standard deviation (2σ) range is $21.50 to $79.50 per barrel.

Key Takeaways

Remember, that option prices and models reflect expected probabilities, not certain outcomes, but that doesn’t make it any less useful.  If someone asks you longingly if oil will be at $80 per barrel again soon, you now can respond with “the markets indicate there is a 97.5% probability that oil prices aren’t expected to get there by next May, so I wouldn’t count on it.”

For more information, contact:

Gregory E. Scheig, CPA/ABV, CFA, CMA
Vantage Point Advisors
Managing Director / Practice Leader
Certified Mineral Appraiser
180 State St., Suite 225, Southlake, TX 76092

214.254.4801

gscheig@vpadvisors.com

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[1] https://finance.yahoo.com/news/pandemic-broken-shale-left-oil-120016554.html, Kevin Crowley, David Wethe and Sheela Tobben Sat, November 28, 2020

[2] https://www.bloomberg.com/news/articles/2020-11-28/the-pandemic-has-broken-shale-and-left-oil-markets-in-opec-hands#:~:text=%E2%80%9CI%20see%20no%20more%20growth,.%2C%20said%20in%20an%20interview.

[3] https://oilprice.com/Energy/Energy-General/OPEC-Oil-Production-Soars-As-Production-Cut-Decision-Looms.html

OPEC Oil Output Soars As Production Cut Decision Looms, Tsvetana Paraskova – Nov 30, 2020

[4] https://www.cnbc.com/2020/11/30/a-lot-of-dissatisfaction-fatigue-within-opec-sp-global-platts.html?&qsearchterm=opec, OIL AND GAS

“There’s a lot of dissatisfaction and fatigue within OPEC+, S&P Global Platts says,” November 30, 2020, Abigail Ng

Featured Image (Maxx-Studio/Shutterstock)