Energy Level: Return to 2013 oil prices unlikely

Energy Level

Return to 2013 oil prices?

By Jim Redden, Correspondent

Aheadline in the June 8 edition of The Wall Street Journal could have been pulled from mid-2013: “Traders Bet on Return of $100 Oil.”

The article went on to say how traders have gobbled up call options tied to oil reaching $100/bbl by the end of next year, suggesting they are betting the current demand-supply imbalance is here to stay for a while. That narrative could easily be read as déjà vu all over again.

For the rst time since early 2008, oil prices hit triple digits in 2013, topping out at nearly $109/bbl. in September and hovered around $100/bbl. over much of the rst half of 2014, until the ood of production overwhelmed the thirst for crude. Prices steadily eroded, eventually sinking to $29.13/bbl. in January 2016, a low that was eclipsed, of course, when Covid did its thing with demand.

There are, however, some stark differences between the environments of then and now, which suggest an encore may not be in the cards. For one thing, eight years ago, investors were eagerly handing over cash, which operators were just as eager to spend to keep their pipelines and storage tanks full. Those same investors now demand scal discipline, insisting on increased returns over higher production.

Even as the U.S. benchmark West Texas Intermediate (WTI) hovers around $70/bbl., producers, for now at least, are bowing to their shareholders. The Energy Information Administration (EIA) estimates that U.S. oil production will increase only modestly from an average of 11.1 million bbl./day this year to 11.8 million bbl./day in 2022.

Then, there are today’s deep-pocketed money people, who are kneeling to societal and government pressure to eliminate or at least slash carbon intensity and, therefore, want nothing to do with any investment related to fossil fuels. Between activist shareholders and the courts, super-majors like Royal Dutch Shell and ExxonMobil have been forced to cut their carbon footprints, suggesting they are unlikely to contribute anywhere near their historical production levels. Even the International Energy Agency (IEA), traditionally an industry cheerleader, said that to meet the global target of net-zero carbon emissions by 2050, operators must immediately stop any new oil and gas exploration.

A likely unintended side effect of this anti-oil sentiment is a premium on the barrels that are produced, which, in turn, raises in ation concerns. This is just as the U.S. economy is recovering from the ravages of the pandemic.

APR. '21 MAY '21 JUN. '21 JUN. '20 WTI Crude Oil 63.50 66.13 72.98 40.60 Baker Hughes Rig Count 13 14 14 11 IHS OSV Utilization 19.2% 19.6% 20.5% 22.6% U.S. Oil Production (millions bpd) WTI Price 10.9 11.0* 11.1* 11.0 U.S. Prod 1000s bopd GOM Rig CountUtil. Rate %

Sources: Baker-Hughes; IHS Markit; U.S. EIA *Weekly Estimated

18 16 14 12 10 8 6 4 2 0 GOM RIG COUNT

GOM Rig Count

6/20 6/21

1 2 3 4 5 6 7 8 9 10 11 12 13

Jun-20 20-Jul Aug-20 Sep-20 20-Oct Nov-20 Dec-20 Jan-21 Feb-21 21-Mar 21-Apr May-21 Jun-21 11 12 13 14 13 13 17 16 17 12 13 14 14

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