October 5, 2023
In a twist that could have far-reaching consequences for global energy markets, the United States finds itself at a crossroads as U.S. shale companies remain reluctant to ramp up drilling activity, even as oil prices flirt with the $100 per barrel mark. Simultaneously, OPEC, the world’s largest oil cartel, remains steadfast in its decision to maintain production cuts. This scenario has raised concerns about tightening oil inventories heading into 2024 and beyond, with significant implications for both the industry and consumers worldwide.
Oil Prices on a Rocky Path
U.S. crude oil prices recently experienced a rollercoaster ride, surging to a 2023 high of approximately $95 per barrel on the New York Mercantile Exchange before retreating by about 7 percent. Similarly, Brent, the international benchmark for oil prices, teased $95 a barrel on London’s ICE Futures exchange before trending downwards.
Despite the stall in the march towards the coveted $100 per barrel, experts predict that crude prices will continue to hover around the $90 mark due to tightening supplies. However, the prevailing sentiment is that oil companies are unlikely to seize this opportunity to increase production.
Industry Leaders’ Caution
Rick Muncrief, the CEO of Devon Energy, weighed in on the situation, indicating that industry players are unlikely to boost drilling in response to short-term price movements. He emphasized the importance of discipline in the face of price volatility, citing government energy policies and Wall Street’s efforts to divert capital away from fossil fuel projects as contributing factors to their caution.
Domestic Drilling Activity Slows
While domestic oil production volumes have shown modest growth in recent months, drilling activity within the United States has decelerated since the close of last year. The Baker Hughes Oil Rig Count considered an early indicator of future production, plummeted to 502 for the week ending September 29, marking the lowest reading since February 2022.
This decline represents the tenth consecutive monthly drop. The White House’s cancellation of seven remaining oil and gas leases in Alaska’s Arctic National Wildlife Refuge, along with expanded protections against future development and drilling, further underscores the challenges faced by the industry.
OPEC+ Holds the Line
On the international front, OPEC and its allies, collectively known as OPEC+, have chosen to maintain their oil output reduction strategy to bolster oil prices. After a recent virtual meeting, the Joint Ministerial Monitoring Committee reaffirmed its commitment to the existing production reduction plan through the end of 2024.
Saudi Arabia, one of the key players in OPEC+, confirmed its commitment to a voluntary production cut of 1 million barrels per day until the year’s end. Russia, another prominent member, pledged to continue its 300,000-bpd voluntary export reduction for the remainder of 2023. These decisions build upon supply cuts announced by Riyadh and Moscow late last year.
Warning Signs of Undersupply
Energy prices have softened recently, prompting speculation that Russia and Saudi Arabia may extend their voluntary cuts until March 2024. Rob Thummel, portfolio manager at Tortoise, noted that global oil markets could remain undersupplied in the foreseeable future.
He expressed concerns that lower inventories may materialize, especially during the traditionally weaker first quarter of global oil demand. Despite these dynamics, Thummel does not foresee oil prices reaching the coveted $100 per barrel threshold.
A Call for Investment
Looking ahead, OPEC’s Secretary-General, Hatham Al Ghais, issued a stern warning about the potential consequences of underinvestment in crude oil production. He emphasized that underinvestment poses a risk to energy security and could lead to increased price volatility as global demand rises.
Al Ghais highlighted the need for substantial investments in the oil industry, estimating a requirement of at least $12 trillion globally from now until 2045.
U.S. Inventory Update
The latest data from the Energy Information Administration indicates a decline of 2.224 million barrels in crude oil inventories for the week ending September 29. Gasoline supplies saw a notable increase of 6.481 million barrels, while distillate stockpiles decreased by 1.269 million barrels.
Additionally, heating oil inventories dipped by 303,000 barrels. Notably, Cushing storage supplies rose by 132,000 barrels, marking a departure from the previous week’s withdrawal of 943,000 barrels. Overall, crude oil inventories currently stand at 767.3 million barrels, down more than 10 percent from a year ago.
The Strategic Petroleum Reserve (SPR) has decreased by nearly 17 percent year-on-year, settling at 351 million barrels, while commercial stocks have dipped 3.3 percent to 416.3 million barrels.
As the world closely watches these developments, the trajectory of oil prices, drilling activity, and global energy supply dynamics remains uncertain, with potential implications for economies, industries, and the environment.