Dec 6, 2020

Thomas Thornton


OPEC MEETING: OPEC meeting saga finally drew to a close. Although we did not get a three-month extension, that most were expecting, we also did not get the scheduled 1.7M increase. Instead, members agreed to a 500K BPD increase for January, with 500K BPD in February and March. The caveat is that there will be an additional meeting with all 23 members before the February and March increase to assess market conditions. The market seemed to like this result and we ended the week on fresh highs.

Cut break down



Inventories in the United States are all within or near the five-year average coming down dramatically off the highs earlier this year. Again, as I have been mentioning for the last couple of weeks, gasoline is the one to watch as the seasonal slowdown is coupled with new lockdowns. Distillates ticked slightly up, but as mentioned there was an exceptionally large amount of imports last week, likely in anticipation of an increase of trucking and freight movement due to holiday deliveries.


Coming from the peak of global crude oil-on-water of 1,355 MB on the 4th May, we have since drawn 290 MB to 1,065 MB, a level below that seen in the run-up to Covid-19. On this basis, the drastic cuts in production and exports by OPEC+ can be viewed as a dramatic success. This has been achieved despite the fact that exports have been creeping higher in recent months after bottoming out in June – ultimately a sign of improving demand. As with all things oil-related, there is a caveat to this positive development. September saw crude net imports (imports greater than exports) of 1,552 kbd as barrels were rapidly taken off the water. That rate has now slowed with oil-on-water starting to plateau and net imports in November declining to just 221 kbd, the smallest by far, thus far in the recovery. -KPLR

This is dramatic success, even though onshore inventories remain high. This will be next to be cleared.


CHINA SANCTIONS: CNOOC is among the latest targets in worsening relations between Washington and Beijing The company has likely been sanctioned in part for its offshore exploration in the South China Sea, where China has claimed drilling rights in waters far from its borders

As a result, CNOOC, China’s main deepwater oil explorer, tumbled to its biggest weekly loss since the oil crash in March after the Pentagon added it to a blacklist that exposes firms to heightened scrutiny and potential US sanctions Hong Kong-traded shares fell 22% last week. US investors will have until November 21, 2021 to divest holdings in CNOOC and its subsidiary companies, and declines last week show some holders are taking action to reduce their positions, according to analysts at Bernstein. That being said, Bernstein analysts do not believe at this time there are any plans for an extension of sanctions, which would prohibit US companies or persons from doing business with CNOOC.

Subsidiaries of CNOOC have stakes in two US shale oil and gas projects. The company also has interests in two offshore projects in the US Gulf of Mexico, which are being developed alongside partners including Shell and Hess. These projects should not be affected.



Chevron Announces $14 Billion Capital and Exploratory Budget for 2021

Lowers 2022 to 2025 annual capital guidance to $14-$16 billion

Chevron Corporation announced a 2021 organic capital and exploratory spending program of $14 billion and lowered its longer-term guidance to $14 to $16 billion annually through 2025. This capital outlook will continue to prioritize investments that are expected to grow long-term value and deliver higher returns and lower carbon, including over $300 million in 2021 for investments to advance the energy transition.

In the upstream business, approximately $6.5 billion is allocated to currently producing assets, including about $2 billion for Permian unconventional development. Approximately $3.5 billion of the upstream program is planned for major capital projects underway, of which about 75 percent is associated with the Future Growth Project and Wellhead Pressure Management Project (FGP / WPMP) at the Tengiz field in Kazakhstan. The remaining $1.5 billion is allocated to exploration, early stage development projects, and midstream activities.

The important note here is the Chevron Capex of $2B in the Permian is 55% less than their March guidance. This will not be the only company to do this, and just another example of why US oil production is challenged to even stay flat, which in turn will keep prices firm.

ENBRIDGE (ENB): Enbridge wins approval for Alberta oil sands pipeline to U.S. Midwest

An Enbridge Inc. pipeline that will help ship more Canadian crude to the U.S. Midwest received final approval, paving the way for construction to start soon on a third key export project for the oil sands after years of delays.

Minnesota approved the stormwater pollution plan for Enbridge’s Line 3 pipeline replacement and expansion, the project’s last pending permit, the company said on Monday. Construction is expected to take six to nine months on a line that will add 370,000 barrels a day of capacity. -BBG

Looking at the chart, Enbridge managed to make it over the 200 day, and looks solidly bullish.

BREAKEVENS FOR NEW WELLS: Bloomberg release new data this week on the break-even costs in US oil plays for new wells. The four most profitable plays had break-even between $33-$36 which included two in the Delaware basin (New Mexico and Texas), Eagle Ford core, and Midland Core. Bakken core wells were categorized in the midtier with break-

even pricing between $40-$48, with non-core Bakken areas in the marginal category with breakeven above $60 – SAF Group

With oil at $46, many of these plays are now in profit range or break-even, provided as we can stay here!

BLOOMBERG OIL MONITOR: Refining is improving in the United States, this will bode well for refiners as products have firmed up. China has fully recovered and is above last year.  


S&P 500 ENERGY: Energy sector looks to have made a “W” bottom climbing above the 200 day. This sector has room to run.

Source: yardeni
Source: Yardeni
Source: Yardeni
Source: Yardeni
Source: Yardeni
Source: Yardeni


Materials have been very strong, with no sign of abating. Gold, showing weakness over the last few months, just retested the 200 day, and I believe opportunities are there, especially in miners that have taken a beat down recently. Steel, also a laggard, looks like it is about to take off.

Source: Yardeni
Source: Yardeni