The Slow Rebound Of Upstream Oil Investment

1. Disregarding Supply Shocks, OPEC + Sticks to Conservative Policy

OPEC + approved another 432,000 b / d increase in production quotas for June 2022, sticking to its conservative attitude despite falling output levels from one of the oil group’s key member, Russia.

Brushing aside risks of Russian output plummeting, OPEC + indicated that supply / demand indicators point to a balanced market, rubberstamping the decision in 13 minutes.

According to S&P Global Platts, there remain only two countries capable of bringing more idled production back – Saudi Arabia and the UAE – but even their spare capacity will be down to 1.6 million b / d by this July.

With OPEC’s proprietary analysis showing that a further 432,000 b / d would keep markets balanced until October, there is an increasing threat that the oft-mooted NOPEC legislation will gain traction in the US Senate.

2. Unprecedentedly Profitable, Russian Crude Production Faces Future Declines

Despite the recent drop in Russian crude production and differentials, coming on the back of Russia’s invasion of Ukraine, the country’s tax revenue will increase by 45% year-on-year to more than $ 180 billion, Rystad Energy forecasts.

Following the crude export drop in March, last month has seen resilient outflows of crude out of Russia’s ports, even though the differential of its main export grade Urals dropped below $ 30 per barrel vs Dated Brent.

As …

1. Disregarding Supply Shocks, OPEC + Sticks to Conservative Policy

Supply

OPEC + approved another 432,000 b / d increase in production quotas for June 2022, sticking to its conservative attitude despite falling output levels from one of the oil group’s key member, Russia.

Brushing aside risks of Russian output plummeting, OPEC + indicated that supply / demand indicators point to a balanced market, rubberstamping the decision in 13 minutes.

According to S&P Global Platts, there remain only two countries capable of bringing more idled production back – Saudi Arabia and the UAE – but even their spare capacity will be down to 1.6 million b / d by this July.

With OPEC’s proprietary analysis showing that a further 432,000 b / d would keep markets balanced until October, there is an increasing threat that the oft-mooted NOPEC legislation will gain traction in the US Senate.

2. Unprecedentedly Profitable, Russian Crude Production Faces Future Declines

Profit

Despite the recent drop in Russian crude production and differentials, coming on the back of Russia’s invasion of Ukraine, the country’s tax revenue will increase by 45% year-on-year to more than $ 180 billion, Rystad Energy forecasts.

Following the crude export drop in March, last month has seen resilient outflows of crude out of Russia’s ports, even though the differential of its main export grade Urals dropped below $ 30 per barrel vs Dated Brent.

As Russia’s storage capacity is limited, the country’s oil producers will be forced to curb production once the assumed EU sanctions take effect and will only start recovering in mid-2023.

With access to foreign technologies barred by EU / US sanctions, it will not be until 2026 that Russia returns to pre-conflict production rates, and even this will happen amidst a quicker-than-expected depletion of mature fields.

3. Big Oil Upstream Investment Is Still Not There Yet

Big oil

Capital discipline has indeed turned out to be one of the main trends of 2022, with leading US oil companies reiterating their commitment to maximizing shareholders’ remuneration.

ExxonMobil (NYSE: XOM) and Chevron (NYSE: CVX) have ramped up their share buyback programs to 30 and 10 billion, respectively, stemming from their best quarterly results since at least 2014.

Whilst global upstream investment is assumed to surpass 400 billion for the first time in the post-pandemic period, it is still lower than 2019 levels and almost half of 2014 levels.

Shale pioneers Diamondback Energy and Devon Energy lifted their quarterly payouts by 17-27%, respectively, arguing that increasing geopolitical volatility makes it difficult to invest as they remain wary of commodity swings.

4. South African Coal Producers Face Export Constraints

Coal

With ICE Newcastle coal prices trending around $ 330 per metric ton, South Africa’s coal exporters are reportedly shunning rail tank cars for trucks as disruptions have become too frequent to cope with.

The logistics-driven disruptions have decreased the pace of South African coal exports, dropping to the lowest in seven months in April, at 4.8 million tons per month.

Transnet, the state-owned railway company of South Africa, declared force majeure last month on its coal contracts, arguing that lack of spare parts, theft, and vandalism have disrupted the company’s operations.

Coal mining firms are already funding private security along the rail lines, with the utilization of drones demonstrably lowering cases of copper theft and vandalism.

5. US Gas Production Stalls Amidst Lagging Offtake Capacity

Gas

The largest gas producer globally, the United States might be soon facing a supply crunch as two key producing regions – the Appalachian and West Texas – are seeing growth rates slow down.

Since Russia’s invasion of Ukraine, Henry Hub gas futures have soared by more than 50%, currently trading around $ 8.8 per mmBtu, yet still, the LNG export pull is incentivizing exports.

US producers might be struggling to combine robust domestic demand and a strong LNG pull as transportation constraints loom large, namely little new offtake capacity happening in West Virginia, Pennsylvania, and Texas.

Ever since the 8 billion Atlantic Coast pipeline project was canceled in 2020, there has been a dearth of new midstream projects with the $ 6.2 billion Mountain Valley line still not completed due to ongoing lawsuits.

6. Lagging Supply Looms Large Over Spiking Lithium Prices

Supply

Despite heightened volatility in the stock markets, lithium stocks have seen extraordinary growth over this week amidst fears of robust demand outpacing the realities of supply.

Lithium prices more than doubled this year to date after surging 280% last year, with LME lithium hydroxide assessments currently trading around $ 81.50 per kg.

Shares of US-based lithium producers Albemarle and Livent have increased by 20% and 30% respectively, on the news of both companies hiking their 2022 earnings guidance.

According to the International Energy Agency, demand for lithium will soar by 900% by 2030, with most analysts agreeing that supply will be lagging demand over the upcoming years, with the shortfall widening to as much as 100,000 tonnes by 2024-2025.

7. US Rolls Out SPR Buyback Plans for 2023

SPR

The US Department of Energy intends to buy back 60 million barrels of crude for its Strategic Petroleum Reserve at some point in H2 2023, following the record 180 million barrel stockdraw taking place this year.

In the first auction for 30 million barrels to be released from mid-May through June, buyers paid $ 105.60 per barrel on average, ie higher than WTI futures at the moment of bidding.

Nudging domestic producers to ramp up output, bidding for the 60-million-barrel buyback is expected to start this fall.

Thus far, Valero (NYSE: VLO) has been the most active buyer of US SPR barrels, taking in almost 7 million barrels in the first auction, followed by Motiva and ExxonMobil.

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