May 2021 Monthly Average Crude Oil Price

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The monthly average U.S.-dollar price of West Texas Intermediate (WTI) crude oil rose by $3.45 (+5.6%), to $65.17 per barrel in May. That increase occurred within the context of a weaker U.S. dollar (broad trade-weighted index basis -- goods and services), the lagged impacts of March’s rebound of 1.76 million barrels-per-day (BPD) in the amount of petroleum products demanded/supplied (to 17.9 million BPD, and a continued decline in accumulated oil stocks (May average: 484 million barrels).

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From the 24 May 2021 issue of The Energy Bulletin:

Global oil demand is recovering with major economies reopening amid a cautious supply approach from OPEC+ and restraint in US shale, Barclays said on Friday (5/21). Despite the possibility of a return of Iranian oil supply and the resurgence of COVID in parts of Asia, global oil demand is “healing,” and oil inventories are set to normalize over the next two to three months, the UK bank said in a note on Friday. Barclays expects the global market to be in a deficit of around 1.5 million b/d in the second half of this year.

Shale Oil. The shale industry, much maligned by investors for excessive spending without returns to show for it, has managed to resist expansion during a 22% run-up in oil prices during the first three months of this year, holding output almost flat. A round-up of data on the drillers shows expectations for record free-cash-flow and signs that the industry is starting to pay its way. There are also indications that workers are finally returning to the fields while drilling ramps up at a more moderate pace.

When squeezing out more oil and gas for less money is a priority for upstream producers, longer laterals are giving a competitive edge in unconventional basins in the US, producing more hydrocarbons per foot drilled. Laterals – the horizontal portion of a well – have become longer and longer during the last 15 years. Drilling out 15,000 feet, or nearly three miles horizontally, reduces the number of wells companies need to drill to achieve their production goals and does it at increasingly lower costs.

Prognosis. The possibility of a peak oil supply crisis is starting to bother some industry observers. In recent years it has become fashionable to talk about peak oil demand, brought about by the climate crisis, rather than about oil supplies running short. As a result of seven years of falling investment and given the capital-intensive nature of the oil business, global offshore production (about 1 in 4 barrels produced) has entered a period where new projects cannot offset existing declines and, at best, production will stay flat for the next several years. This significant loss of future capacity means the burden falls on US shale and OPEC to satisfy demand growth, yet the ability to do so is a problem.

While US shale basins have acted as the global swing producer in recent years, the era of US shale hyper-growth is over. The failed experiment of unbridled spending due to unlimited access to external capital resulted in the incineration of hundreds of billions of dollars of shareholder equity and a subsequent investor-led change to shale companies’ very ethos. The old model of massively outspending cash flow and chasing growth has evolved to underspending, which has led to the return of capital back to investors in the form of dividends and share buybacks. This profound change, combined with the depletion of much of the higher quality drilling inventory, means that the future growth rate of US shale will be a fraction of years past.

For OPEC countries the ability to remain going concerns and satisfy their sovereign needs has struggled for years with insufficient revenue due to weak oil prices. Many had to deplete foreign exchange reserves, sell off stakes in crown corporations, and cut social spending, thereby risking regime change due to violating the unspoken social contract with their populaces. The least attractive use of scarce capital was an investment in new oil productive capacity, especially in an era of low oil prices.

While the market is currently concerned with the return of some 6 million b/d of voluntarily curtailed OPEC production, given the stronger-than-expected rebound in global oil demand, these volumes will be quickly returned without disrupting oil balances by early 2022. As a result of sovereign needs superseding the investment in new capacity once this curtailed production returns, OPEC will exhaust its spare capacity and cannot significantly grow in the years ahead. This milestone will rival the importance of the end of US shale hyper-growth and could mark the beginning of a multi-year bull market for oil.

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Selected highlights from the 28 May 2021 issue of OilPrice.com’s Oil & Energy Insider include:

[The last full week of May] was a historic week for the oil industry, potentially marking a turning point, at least for the corporate strategies of the oil majors. More curbs on the supply side do add some bullish sentiment to the market, although the impacts on the fundamentals are not necessarily going to unfold in the near term. But in the wake of the huge blows to the oil majors this week, more than a few analysts spoke about growing odds of a supply crunch in the years ahead.

Shell loses in court. Royal Dutch Shell lost a landmark legal case in a Dutch court, which, if it stands, will require 45% cuts in GHG emissions by 2030. The case is seen as a warning sign for the rest of the oil industry, signaling legal exposure to Scope 3 emissions (those burned by end-users). More litigation related to emissions is likely.

Exxon loses board vote. Engine No. 1 won votes for two if its candidates in a stunning blow to ExxonMobil. The win is being viewed as a shocking and powerful statement by shareholders as to their displeasure with the oil giant for not doing enough to mitigate the effects of its business on the climate. And For Exxon, it could mean big changes are coming.

Court ruling could shrink Shell. The court ruling ordering Shell to speed up its plans to cut greenhouse gas emissions could lead to a 12% decline in the company's energy output, including a sharp drop in oil and gas sales, according to Reuters.

Exxon must cut production, Engine No. 1 says. Engine No. 1 said that ExxonMobil must cut oil production. “They need to position themselves for success,” Charlie Penner, of Engine No. 1, told the FT. “You would certainly believe that would mean less oil and gas production going forward.” The hedge fund’s founder, Chris James, added: “Watching that meeting yesterday was such a perfect example of how they don’t realize the world has changed. It was all on display.”

Chevron shareholders vote for Scope 3. Chevron also lost a notable shareholder vote, with a measure requiring a target to reduce Scope 3 emissions passed by more than 60% of shareholders, another major rebuke to the oil industry.

Oil rises after boardroom brawls. Oil prices rose early on Friday for a sixth consecutive day and were on track for weekly and monthly gains after the defeats on climate policies that major oil firms suffered at the hands of shareholders and judges.

Total to see investor pressure. On the heels of the string of losses suffered by Exxon, Chevron, and Shell, France’s Total (NYSE: TOT) is facing growing scrutiny from investors over its corporate strategy.

Biden defends Alaska oil project. President Biden’s administration has backed the Willow oil project in Alaska in a new filing by the Department of Justice.

Moody’s: Credit risks growing for Big Oil. This week’s climate-related actions in boardrooms and courtrooms involving some of the largest international oil companies signal a rising threat to the sector, Moody’s Investor Service said in a comment on the industry. “A new court ruling against Royal Dutch Shell and shareholder votes at ExxonMobil and Chevron highlights the increasing credit risk for major oil producers over concerns about climate change,” Moody’s said.

The foregoing comments represent the general economic views and analysis of Delphi Advisors, and are provided solely for the purpose of information, instruction and discourse. They do not constitute a solicitation or recommendation regarding any investment.