U.S. exploration and production (E&P) firms last week approached the pandemic-era peak oil output level as catalysts for global demand gather and benchmark crude prices recover from fears imposed by financial system upheaval.
E&Ps churned out 12.2 million b/d for the week ended March 24, according to the U.S. Energy Information Administration’s (EIA) Weekly Petroleum Status Report on Wednesday. The result was down 100,000 b/d from the previous week. But the prior week matched the U.S. high mark since the onset of coronavirus outbreaks in early 2020. Producers hit a record 13.1 million b/d in March of that year.
The latest EIA print marked a notable jump from the year-earlier level of 11.7 million b/d.
Brent crude prices, the international benchmark, hovered close to $80/bbl in intraday trading Wednesday. This marked a rebound from a slump near the $70 level earlier this month, when a banking sector crisis amplified fears of a global recession that could curb oil demand.
UBS Group AG in March agreed to take over struggling rival Credit Suisse Group AG for more than $3 billion. Credit Suisse had faced a run on its deposits, one hastened by its own losses as well as trouble in the United States. Also this month, Silicon Valley Bank in California failed after depositors abandoned the bank because of its heavy concentration in risk-laden technology startups. Signature Bank in New York collapsed following big bets on the crumbling cryptocurrency market.
This followed already simmering concerns about rising interest rates and stubbornly high inflation.
However, government intervention in the United States and Europe has, at least in the near term, helped contain bank woes and allowed oil traders to shift their attention back to demand drivers, said Jared Rystad, CEO of Rystad Energy.
“Over the past few weeks, oil prices were caught in a crossfire between concerns over a global banking crisis and worries about inflation,” Rystad said. Brent prices, however, “managed to bounce back” amid “indications that crude balances will tighten in the second half of 2023.”
He said Brent prices would likely exceed $100/bbl later this year. “A key shift is brewing on the demand side, with India set to eclipse China as the biggest driver of global growth in oil demand. India’s ever-expanding population coupled with a lag in the conversion” to electric vehicles “are the key drivers for this shift.
“Moreover, there is a broadly held view that a tighter oil market is on the way, reflecting an anticipated rise in air traffic and Chinese demand in the second and third quarters,” he added, noting China’s recent move to lift pandemic-related travel restrictions. “In addition, despite tightening monetary policies in advanced economies, lingering excess money supply will continue to support the purchasing power of oil consumers.”
BMO Capital Markets analysts shared in the price optimism for later this year.
Crude prices “could strengthen over the second half of 2023 as global oil demand improves, outpacing supply and shifting the supply-demand balance to a deficit,” the BMO analysts said.
Notably, the Saudi Arabia-led OPEC-plus launched an effort in late 2022 to cut production by up to 2.0 million b/d from the highs of last year. It has since confirmed intentions to stick with the plan. The producer group is slated to meet April 3, and analysts anticipate it will maintain the policy.
ClearView Energy Partners LLC analysts noted that Russian cuts to crude production in retaliation of European Union sanctions are now in the works and would likely minimize any need for additional OPEC-plus reductions. Russia is trimming output by about 500,000 b/d in protest of the Western penalties that were imposed because of the Kremlin’s war in Ukraine.
Meanwhile, U.S. petroleum demand for the March 24 period increased 2% week/week, EIA said. This followed a 5% jump the prior week. Increased consumption of gasoline boosted overall demand gains over the past two weeks.
With demand up last week, crude inventories, excluding those in the Strategic Petroleum Reserve, decreased by 7.5 million bbl from the previous week. Still, at 473.7 million bbl, oil stocks were 6% above the five-year average.
