- US oil production averaged ~10 mb/d in May.
- But production is set to return in June likely back to ~11 mb/d.
- We see US oil production recovering eventually back to ~11.5 mb/d but existing decline rates will eat into production after that.
- Oil prices are rallying ahead of fundamentals, which means it will be a choppy rebalancing if product storages don't start drawing soon.
- In order to avoid a choppy rebalancing, it needs to be demand led via lower product storages and higher refinery throughput.
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Welcome to the ahead edition of Oil Markets Daily!
EIA reported a supportive crude storage figure today but the overall report was bearish as total liquids continue to build.
Source: EIA, HFI Research
US oil production finished May averaging ~10 mb/d with an overall drop of ~2 mb/d m-o-m. If we take into account adjustments, it has dropped ~3.2 mb/d since March.
Most of the production drop is shut-in barrels, so we expect this to start recovering in June. For the time being, we have June production recovering back to ~11 mb/d with July volume around ~11.5 mb/d.
The lack of well completions will eat into the base production rate as existing basin decline pushes overall production lower. August should see US oil production flatlining around 11.5 mb/d as well.
Obviously, these estimates will be subject to revisions, so we will keep a close eye on production figures going forward.
For the time being, we have not seen any meaningful recovery in associated gas production, which is a good tale that oil production has not rebounded meaningfully either.
Oil Price Rallies Ahead of Fundamentals
But the recent crude rally is going well beyond where fundamentals are today. Refining margins are starting to recover, but continue to lag the crude movement. While OPEC+ is set to agree on extending the ~10 mb/d cut for a month or two, the issue comes down to compliance. Global crude timespreads are starting to inch towards backwardation, but without solid fundamental support from higher refinery throughput, it will be very difficult for the timespreads to hold.
As a result, the pace of US oil production rebounding will play a big role in the next rebalancing phase for the oil market. If US shut-in production returns too fast, we may delay the recovery by another month or two. Refinery throughput needs to increase to support the increase in production, or else all those barrels will just be stored again.
So the forward drivers of the oil market will continue to be:
Demand > product storage moving lower > refinery throughput moving higher > margins moving up > crude rallies > timespreads move into backwardation > crude storage draw
If the order of the recovery is flipped in any way, it will be a choppy rebalance.
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