BAKU, Azerbaijan, Feb.22
By Leman Zeynalova – Trend:
at its next full meeting on March 4, as production quotas have been already set for February and March, Trend reports citing the US JP Morgan Bank.
“If demand develops in line with our expectations, our analysis indicates that Saudi Arabia will be able to reverse its 1 mbd cut in April, with the rest of the alliance adding another 500kbd to the market. We believe demand conditions will allow the group to easily ramp up production by another 1 mbd in May while keeping the market in deficit—a necessary condition to continue to draw down stockpiles. This essentially means that the return of 2.15 mbd of supply would be front-loaded in 1H21, while about 5 mbd of OPEC+’s January 2020 production would need to remain out of the market for the entirety of 2H21. This path would allow for further inventory normalization while keeping prices within the $60-65/bbl range until demand recovery is on a solid pace somewhere 4Q21, when we see prices breaching $70/bbl. Our model suggests that were OPEC+ not to bring back additional barrels in April and May, prices could rise into the low $70s in 2Q21,” reads the report released by JP Morgan Bank.
However, as prices rise, the calculation for the OPEC+ alliance becomes more complicated, according to the Bank.
“On the demand side, rising oil prices could begin to drag on demand growth in developing economies, hurting a fragile global economic recovery (India’s Oil Minister announced today that price-sensitive Indian consumers are being affected by rising petroleum product prices). On the supply side, the incentive for individual members to ease curbs and juice up their revenues increases significantly. Rising oil prices might also facilitate a quicker revival of US shale production. So far this possibility has been largely dismissed, and the consensus view has been that capital markets will remain closed for US E&P producers to fund a sizable rebound in capital-intensive drilling.
Maybe, but the average yield for bonds in the JPM US High Yield Energy Index (JPDEENER)—a group that includes upstream and fracking companies—is just 6.3 percent. This print is not only one of the lowest on record (the record low was in June 2014 at 5.2 percent), but also only about 3%-pt off from the 3.24 percent yield on the 10-year US Treasury note—which carries essentially no default risk—less than three years ago. There are signs that producers in the Permian Basin started the year off strong, accelerating drilled, uncompleted well drawdowns in January. We anticipate a couple of weeks of weather-related delays in drilling and completion activities, but as long as operators have sufficient drilled but unfracked well inventory to complete, they should be able to easily grow production while keeping capex in check.”
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