Oil producers commit to supply curbs, sustaining price rally

Oil is extending a steady recovery into 2021, aided by fresh signals that the world’s biggest producers won’t turn on the spigots and flood the market (reports Dow Jones).
15th January 2021
Resources Rising Stars

Oil is extending a steady recovery into 2021, aided by fresh signals that the world’s biggest producers won’t turn on the spigots and flood the market (reports Dow Jones).

US crude futures recently rose above $US50 a barrel for the first time since last February, the latest milestone in a rebound powered by an uptick in travel and economic activity following the easing of coronavirus restrictions. Output cuts by large suppliers from Saudi Arabia to US companies are turbocharging the advance, giving traders confidence that demand will exceed supply.

Prices have hit new peaks since Saudi Arabia said last week it would unilaterally cut output in February as part of an agreement by the Organization of the Petroleum Exporting Countries and allies like Russia. The supply curbs instilled faith that the cartel will remain flexible with output even if the pandemic worsens and hurts demand.

US shale producers are also indicating that they are in no rush to increase supply and instead plan to pay off debt and return cash to shareholders. Taken together, the commitments should help the energy industry’s recovery and highlight a recognition among producers that the economic toll caused by the pandemic is far from over, investors and industry executives say. That means there is no need for suppliers to spend on additional output.

“I don’t think the world really needs the oil at this point in time, so there’s not a big reason to grow,” said Richard Dealy, president and chief operating officer of Texas oil company Pioneer Natural Resources. Despite the recent rise in oil prices, Pioneer still plans to cap oil-production growth at zero to 5 per cent in 2021.

Overnight, West Texas Intermediate crude for February delivery rose 96 cents, or 1.8 per cent, to close at $US53.21 a barrel. Futures on Brent crude, the benchmark in international energy markets, rose 1.7 per cent to $US56.58 a barrel.

Oil’s climb underscores the remarkable rebound since last April, when a glut briefly sent US crude below $0 for the first time ever.

It also offers a boost for bruised companies like Pioneer and Chevron Corp. that have trimmed workforces in response to industry turmoil. The sector has been among the hardest hit by the coronavirus and the stretch of trading below $US50 was the second-longest since oil first topped that level in 2004, according to Dow Jones Market Data.

The climb above $US50 should benefit the global economy, analysts say. Prices are now high enough for many companies to cover their production costs, but not so lofty that fuel prices will jump for consumers. Some investors are betting the rally will continue as the delivery of coronavirus vaccines sparks travel at the same time that suppliers limit production.

“There’s such huge pent-up demand and people want to travel,” said Gary Ross, chief executive of Black Gold Investors and founder of consulting firm PIRA Energy Group. “Demand will be back to 2019 levels earlier than people think, probably by the third quarter.” He expects oil to hit $60 some time in the first half of the year.

Among the “Ten Surprises” Byron Wien and Joe Zidle of investment giant Blackstone Group Inc. included on their annual list of prognostications for the year ahead: crude rising further to $US65 and energy numbering among the stock market’s leading sectors.

Beaten-down shares of producers have climbed recently with investors embracing the message that companies are in no rush to lift output. The number of oil rigs drilling in North America has only edged higher and is still well below where it was early in 2020, according to Baker Hughes.

It isn’t just a matter of promises to investors. Most American companies will have to give priority to paying off debts over boosting production in the wake of the pandemic, analysts say. Even with oil at $US50, it would take the 20 largest US shale companies 3.4 years on average to bring debt levels down to healthy levels relative to their overall capitalisation, according to consulting firm Wood Mackenzie.

Many companies around the world are also bracing for a bumpy recovery, especially with a new variant of the coronavirus spreading and the vaccine rollout uncertain. That is increasing focus on the leading OPEC producers, which are expected to respond if the economy softens.

“If they have to, they can slow the pace of bringing supply back,” said Rob Thummel, a senior portfolio manager at investment firm Tortoise. “They seem to be pretty disciplined.”

OPEC’s co-ordination marks a reversal from early last year, when a production feud between Saudi Arabia and Russia glutted the market as demand crashed. Confidence that supply won’t increase has helped push net bets on higher US crude prices by hedge funds and other speculative investors to their highest level since mid-August, Commodity Futures Trading Commission data show.

“People still react very positively if there’s any type of supply constraint,” said Darwei Kung, head of commodities and portfolio manager at DWS Group.

Another factor driving bullish sentiment: busier traffic patterns in large US cities. Congestion during rush hour in December rose in 27 of the 40 cities tracked by analysts at Tudor, Pickering, Holt & Co. Gains were led by demand centres in New York, Chicago and Houston.

Even though many investors expect a winding path ahead, they are hopeful the coming months will offer more price stability after last year’s roller coaster.

“It feels much better today than it did for lots of parts of 2020,” said Stacey Morris, director of research at energy index provider Alerian.


Image: Ahmed Jadallah/Reuters

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