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Dampened US supply reactivity is leading the international oil
market to a new, higher price band
United States (US) E&Ps are set to register their strongest
free cash flow results in years
Strongest free cash flow is expected to be registered by US
E&Ps thanks to surging oil and gas prices and restrained
spending. We continue to expect these producers to exert spending
restraint through the end of the year as they focus on repairing
balance sheets and delivering robust cash returns to investors.
By 2022, we believe the pathway to volumetric growth will
emerge, as West Texas Intermediate (WTI) prices averaging in the
$70s should allow producers to deliver both meaningful returns of
capital to shareholders and boost spending to support volume
growth. Base decline rates have also materially decelerated given
the decline in new well additions in 2020-21 compared with previous
years; this will make growth easier next year.
We are projecting US crude oil production to increase by 700,000
b/d in both 2022 and 2023. We have left our 2022 US supply outlook
unchanged (+700,000 b/d) despite our upward revision to WTI prices
of roughly $15/bbl in fourth quarter 2021 and $11/bbl in 2022.
Cushing inventories likely headed toward tank bottoms
Backwardation in the WTI forward curve has reached the highest
level since 2014, both reflecting a tightening crude balance in the
US Midcontinent and reducing incentive to store barrels at the
Cushing hub. Price differentials will shift to eventually replenish
storage levels: we expect Cushing prices to strengthen relative to
Midland and Houston to attract barrels from the Permian Basin and
reduce outflows to the Gulf Coast, where inventories are
fuller.
Light, sweet crude supply is tightening in the US Midwest and
Midcontinent
PADD 2 and PADD 4 crude oil production is averaging about
400,000 b/d lower this year than in 2020, reducing light, sweet
supply to regional refineries. Meanwhile demand for crude in the
region has been robust, with PADD 2 refinery throughput at times
exceeding 2019 (prepandemic) levels. As a result, inventories are
not just low at Cushing—at various hubs throughout PADD 2, they
are at levels not seen since 2015.
Posted 05 November 2021 by Aaron Brady, Vice President, Energy Oil Market Services, S&P Global Commodity Insights
