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Oil

Shale is the name of the game

The (WTI) oil price dropped 15.6% in January, closing the month at USD 51.56 per barrel (vs. USD 61.06 at the end of December). The XOP index of US shale oil & gas producers plunged 19.2%.

shaleSource : Bloomberg

This unexpected and very severe correction was caused by the outbreak of the Chinese coronavirus and subsequent draconic measures taken by the government to contain its spreading. Chinese refineries are running at only 50% of their capacity (instead of the usual ca. 65% during the Chinese New Year period), owing to the virtual standstill of part of the local economy. Their inventories have increased substantially, triggering lower demand for crude oil, even as worldwide production capacity has increased by 400,000 barrels/day, with the new Johan Sverdrup oilfield (Norway - North Sea) now up to full speed. Fortunately, Libyan production fell (temporarily) by 1 million barrels/day over the same period.

OPEC and Russia are considering another cut in output to rebalance the market. We expect them to make a decision in early March, at which point the situation in China will hopefully be somewhat clearer. There is much guessing by industry specialists as to the impact of the coronavirus on worldwide oil demand, and their figures vary widely. A most probable scenario is that the epidemic will peak sometime around the end of the first quarter/ beginning of the second quarter and China be operating normally again in the second half of the year. This would imply, all else being equal, that an excess production of nearly 1 million barrels per day has to be taken into account for the first six months of 2020. It will come as no surprise that this leaves little room for a higher oil price during the next couple of months.

As regards US shale oil producers, the currently low oil price will certainly keep them financially disciplined, with investments in new production capacity limited to cash flow generated. As a result, US production might end the year barely above its present level, which will help inventories contract once China is fully up and running.

The producers themselves expect the (WTI) oil price to end the year between USD 50 and 70 per barrel (50% of them see it between USD 50 and 60, and 34% of them between USD 60 and 70). US shale oil producers will be reporting their Q4 2019 results over the next couple of weeks, which will hopefully give us some insight as to their plans and expectations for 2020.
That said, a higher oil price will be necessary for their stock prices to rebound significantly.

(Update : 02.2020)

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