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Wednesday, December 8, 2021

November 2021 Monthly Average Crude Oil Price

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The monthly average U.S.-dollar price of West Texas Intermediate (WTI) crude oil slipped by $2.33 (-2.9%), to $79.15 per barrel in November. That increase occurred within the context of a stronger U.S. dollar (broad trade-weighted index basis -- goods and services), the lagged impacts of September’s decrease of 287,000 barrels-per-day (BPD) in the amount of petroleum products demanded/supplied (to 20.2 million BPD, and a plateauing of accumulated oil stocks (November average: 434 million barrels).

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From the 29 November 2021 issue of The Energy Bulletin:

Oil:  The discovery of a new coronavirus variant named Omicron triggered global alarm on Friday as countries rushed to suspend travel from southern Africa, and the equity and commodity markets on both sides of the Atlantic suffered their most significant drop in more than a year. The World Health Organization said Omicron might spread more quickly than other forms of the virus, and preliminary evidence suggested an increased risk of reinfection.

Oil prices plunged on Friday as reports of the new coronavirus variant sparked fears of more pandemic lockdowns and another blow to fuel demand. West Texas Intermediate dropped by 13% to settle at $68.15/barrel as US traders returned following Thanksgiving. The international benchmark Brent fell 12% to settle at $72.72/barrel. Both oil markers had their biggest one-day declines since the WTI price briefly went negative in April 2020 at the height of the pandemic.

The fall in price came days after the White House announced that it would release some 50 million barrels of crude from its Strategic Petroleum Reserve over the coming months in conjunction with added contributions from five other countries. The US announcement on Tuesday had little immediate effect on prices. But news of the Omicron variant has now overwhelmed sentiment.

The Biden administration proposed several changes to the nation's federal oil and gas leasing program, including hiking fees on drilling companies to keep them out of sensitive wildlife and cultural zones. The recommendations followed a months-long review aimed at ensuring drilling on federal lands and waters benefits the public. But in a sign of the extreme controversy surrounding the issue, environmental groups slammed the proposals as too weak, and the industry criticized them as too harsh.

Shale Oil:  Producers in the US are showing no sign of accelerating the pace of deployment for drilling rigs, despite criticism from the Biden administration that they're holding back on production to the detriment of consumers. According to Baker Hughes, the number of rigs drilling for crude in US fields rose by 6 to 467 this week. Moreover, operators added 23 drilling rigs in the second consecutive month, suggesting that explorers are more interested in growing production slowly and steadily than in heeding the administration's call for more supply.

The biggest US oil-rig operator, Helmerich & Payne, posted a steeper-than-expected loss and warned of ballooning costs amid worsening energy-industry inflation. Analysts at Tudor, Pickering, Holt & Co. say growing demand for rigs isn't translating into improved profitability. Helmerich's warning follows similar commentary by America's No. 2 provider of fracking pumps, Liberty Oilfield Services, which last month cited "serious" supply-chain issues that have boosted costs faster than they can be passed on.

Prognosis: The US uses more gasoline than any other nation globally, and lately Americans have grown concerned about the swift rise in costs at the pump. The average retail price of gas was at $3.40 for a regular gallon, up from roughly $2.11 at this time a year ago and the swift increase - 61% over 12 months - has alarmed consumers. As a result, President Biden tried to deliver a Thanksgiving gift for US drivers on Tuesday by announcing that the US would release 50 million barrels of oil from its 600-million-barrel Strategic Reserve in response to voter concerns. The UK, India, South Korea, Japan, and China also agreed to release oil stocks. Britain's planned release is for up to 1.5m barrels; India about 5 million and Japan about a million. Volume from the others is not yet known.

The total release from all the countries involved covers about 12 hours of worldwide oil demand of about 100 million b/d. Only 32 million barrels of the US's contribution will be from newly authorized releases. They will be delivered to the markets slowly between mid-December and the end of April 2022 in a swap with oil companies, which must return an equivalent volume by 2024. The other 18 million barrels have already been authorized. Given that the US release and that of other nations will be on the order of 40 million barrels spread over 229 days, the impact on world prices will be minimal as the world will consume some 2.3 billion barrels during this period.

Industry observers generally agreed that the move would have a limited effect on lowering gasoline prices. Market prices recovered after the announcement in a few hours. So far, the most significant impact of the release announcement was that OPEC+ producers began threatening to forego planned monthly production increases of 400,000 b/d.

Over the longer term, the future for OPEC+ oil production does not look bright. There are persistent rumblings that Russia's output is peaking for geological reasons, and output from most of the smaller OPEC members has been declining for years. Only a handful of middle eastern states have substantial oil reserves left and these are on the cusp of unbearable summer temperatures leading to serious crop and water shortages that could stifle oil production growth.

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Selected highlights from the 30 November 2021 issue of OilPrice.com‘s Intelligence Report include:

Black Friday's price collapse shook the oil market, destroying the bullish sentiment that had been building throughout the month. While prices partially recovered on Monday, they plunged again on Tuesday morning as uncertainty intensified. Concerns over the rapid spread of the Omicron variant have bolstered fears of demand destruction. Everyone is now focused on the upcoming OPEC+ meeting as the potential loss of 2-3 million b/d of global demand could convince the cartel to halt its 400,000 b/d monthly production additions.

Saudi Arabia Shrugs Off Omicron Fears. Whilst other Middle Eastern countries were hesitant to assess OPEC+ prospects of incremental supply, Saudi Arabia's energy minister Prince Abdulaziz bin Salman and Russia's energy minister Alexander Novak were inclined to keep the oil group on its pre-charted course.

Jet Fuel Demand Poised to Suffer. Demand for jet fuel, by far the largest laggard in terms of post-pandemic recovery, is now under severe pressure as Omicron fears continue triggering border closures. Originally, it was expected to have a robust Q4, but these new developments could ruin that.

White House Seeks US Royalty Rate Revamp. In a recently published blueprint for the future development of oil and gas projects on federal lands, the Biden Administration is advocating an increase in royalty rates, currently some 12.5% on onshore leases and 12.5-18.75% on offshore leases.

 

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.

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