June 2021 Monthly Average Crude Oil Price

Click image for larger view

The monthly average U.S.-dollar price of West Texas Intermediate (WTI) crude oil rose by $6.21 (+9.5%), to $71.38 per barrel in June. That increase occurred within the context of a weaker U.S. dollar (broad trade-weighted index basis -- goods and services), the lagged impacts of April’s increase of 255,000 barrels-per-day (BPD) in the amount of petroleum products demanded/supplied (to 18.3 million BPD, and a continued decline in accumulated oil stocks (June average: 463 million barrels).

Click image for larger view

From the 28 June 2021 issue of The Energy Bulletin:

Oil: Prices posted their fifth straight weekly gain, the longest winning streak since December, as demand recovers, and supplies continue to tighten in the US and China. Futures in New York rose 3.4% last week to the highest level since October 2018. Demand continues to rebound while the market expects output will only get a modest increase from the OPEC+ alliance, which meets this week to discuss supply policy.

US crude inventories fell by 7.6 million barrels in the week to June 18th to 459.1 million barrels, their lowest since March 2020. The draw was nearly double analysts' expectations. Crude oil inventories in America's largest storage hub could fall to historically low levels by the end of September as the demand rebound continues to outpace production. US refining capacity last year fell 4.5% to 18.13 million b/d from a record 18.98 million a year earlier. It was the first annual decline since 2018.

The chief executive officers of Royal Dutch Shell and TotalEnergies joined major commodity traders and banks in predicting that oil could go as high as $100 a barrel. However, they also said volatile markets could drive prices back down again. Low investment is “going to exacerbate supply and demand tightness as the economies pick back up again, and then in time we'll see supply pick up and rebalance,” Exxon Mobil CEO Darren Woods said at the Qatar Economic Forum Tuesday.

OPEC: Oil inventories are falling, and market forecasters warn of a supply crunch this summer if OPEC and its allies do not agree to pump more crude imminently. OPEC+ ministers may oblige when they meet this week to discuss production quotas for August and possibly beyond. But how much crude to produce and for how long are the key questions. Many analysts expect a tempered short-term rise of perhaps 500,000 b/d to 700,000 b/d. Members will be keen to capture some of the rising oil demand without pushing prices down, while they also await the outcome of the stalled US-Iran nuclear deal negotiations.

Shale Oil: Activity in the US oil and gas sector continued growing strongly in the second quarter, with higher capital spending and significant cost pressures, according to the Dallas Fed survey of 152 energy companies released June 23rd. The oil production index jumped 18.7 points to 35 points for Q2, its second-highest reading since the survey started in 2016. The natural gas production index rose 19 points to 35. Executives expect the WTI crude oil prices to be $70/b at year's end and the Henry Hub natural gas price at $3.10/MMBtu

With oil trading above $70 per barrel while investment activity remains low, the world's publicly traded exploration and production companies are set to generate record-breaking free cash flows (FCF) in 2021, Rystad Energy reports. Their combined FCF is expected to surge to $348 billion this year, with the previous high being $311 billion back in 2008. In addition, Rystad Energy estimates that total gross revenue for all public upstream companies is expected to increase by almost $500 billion in 2021, or 55% compared to last year. At the same time, the investment level of these companies is only expected to grow by around 2% in 2021, resulting in significantly higher profits.

Prognosis:  Underinvestment and a focus on the energy transition will create a global oil supply shortage in two to four years, according to three-quarters of US oil and natural gas executives surveyed by the Federal Reserve Bank of Dallas. One upstream executive said policies focused on limiting oil and gas growth, restrained capital budgets in favor of free-cash-flow generation, and continued consolidation could lead to an undersupply vs. growing demand. “OPEC is back in the driver's seat,” the executive said. “If they can balance market share with high prices, they'll take it.”

Another respondent said only one of 400 institutional investors their company has worked with is currently willing to give new capital to the oil and gas sector. And the same is true for public companies and international exploration, the executive said. “This underinvestment coupled with steep shale declines will cause prices to rocket in the next two to three years,” the respondent said. “I don't think anyone is prepared for it, but US producers cannot increase capital expenditures: the OPEC+ sword of Damocles still threatens another oil price collapse the instant that large publics announce capital expenditure increases.”

Click image for larger view

Selected highlights from the 2 June 2021 issue of OilPrice.com’s Oil & Energy Insider include:

The OPEC+ meeting resulted in some unexpected 11th-hour drama, delaying a decision that was expected on Thursday. Oil prices slipped on the news.

But the outcome could still be a bullish one. The size of the proposed production increase was lower than most analysts had expected, coming in at an average monthly addition of 400,000 bpd, whereas expectations had been for 500,000 bpd. But there is also a possibility that OPEC+ might not add any barrels to production. The group meets again on Friday.

UAE delays decision. The UAE delayed a deal as it demanded a higher production quota. “Negotiations today will be difficult as OPEC+ knows that if the UAE is allowed to produce from a different base, other members may protest,” Rystad Energy said in a note.

India’s demand back to 90%. India’s gasoline consumption has rebounded to 90% of pre-virus levels as motorists took back to the roads with Covid-19 curbs being eased.

Americans face higher gas prices. Heading into the holiday weekend, American motorists face the highest average gasoline prices in seven years.

Shadow lenders take over U.S. shale patch. Banks have started to cut their exposure to the U.S. shale patch. While traditional lenders are cutting their losses and de-risking energy loan portfolios, alternative capital providers are stepping up to scoop up U.S. energy debt at a discount and take part in debt or equity transactions that could give them returns sooner than a loan would for a bank.

Canadian oil sands expected to grow. The 590,000 b/d Trans Mountain Pipeline expansion and the 370,000 b/d Line 3 expansion by Enbridge (NYSE: ENB) opens up room for the increase in Canadian oil sands production, according to IHS Markit. The 10-year forecast still calls for 3.6 million b/d, up 22% from the fully restored, post-Covid-19 pace of 2.95 million b/d.

Utilities need $500 billion to make grid resilient. The heat dome led to blackouts in the Pacific Northwest, in a preview of what is to come with rising temperatures. One study says that U.S. utilities need to invest $500 billion to upgrade the electric grid and harden it for a warming world.

$3.2 trillion needed for renewables. IRENA, based in Abu Dhabi, says that private lenders and capital markets will need a fourfold increase in funding for renewables to as much as $3.2 trillion this decade.

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.