American Oil and Gas Reporter - January 2022 - 39

A New Game Plan
Independents have spent the past two
years restructuring, cutting costs, slashing
debt, rationalizing assets and otherwise
fortifying their balance sheets. As the
new year progresses, depletion may go a
long way toward determining the degree
to which these same companies will ramp
development drilling and even dust off
postponed tests of step outs and new
field prospects.
Beyond that, there are also what some
call the " unknown unknowns. " Decades
ago, British Prime Minister Harold
Macmillan responded to a question about
the most influential factor facing his administration
by identifying " Events, dear
boy, events. "
As usual, events far beyond the control
of independent operators-whether working
tight oil in West Texas or Marcellus dry
gas in West Virginia-will prove pivotal.
Anything from a possible Russian invasion
of Ukraine, a new U.S.-Iran nuclear deal,
and the waxing or waning of the Covid19
pandemic likely will figure heavily
into the direction America's oil and natural
gas producers take in 2022.
The Path For Crude Oil
Oil and gas companies hoping for a
year of stronger prices certainly can take
solace from the fact that the contingent
of bullish voices in the choir seems much
louder than a year ago, when West Texas
Intermediate was trading some $25 a
barrel lower at the Cushing, Ok., hub.
Eli Rubin is a senior energy analyst
at EBW Analytics Group. He notes that
the oil market has continued to withstand
bearish pressures as the omicron variant
has spread rapidly across the globe,
suggesting a resilient market resting on
firm underlying fundamentals, including
historically low oil inventory levels (Figure
1).
U.S. crude, gasoline and distillate inventories
were a combined 59.7 million
barrels below the five-year average the
week before Christmas. " Although coronavirus
headlines have taken over the
news cycle, recent crude data has been
robust, " Rubin comments. " The 4.6 million
barrel draw for the week ending Dec. 17
was the largest in three months, despite a
2.0 MMbbl barrel Strategic Petroleum
Reserve release. Strength in crude exports
undergirded the fundamental tightness,
with 3.6 MMbbl/d of exports the largest
since early July. "
The market followed up with withdrawals
across the board in both crude
oil and product inventories the week leading
up to Christmas. The U.S. Energy
Information Administration reported another
healthy 3.6 MMbbl draw, along
with declines in gasoline, distillate and
propane/propylene inventories. In all,
total commercial petroleum inventories
decreased by 18.9 MMbbl for the week
of Dec. 24, with crude oil and product
stocks all well below their seasonal fiveyear
averages.
Furthermore, with European and Asian
natural gas prices trading 10 times higher
than Gulf Coast prices and repeatedly setting
new record highs, U.S. refineries are the
beneficiaries of cheaper feedstock that may
increase run rates and physical demand for
U.S. crude exports, Rubin explains.
The million-dollar question, of course,
is the impact of the omicron variant, but
the underlying severity of the disease remains
a huge wildcard, according to
Rubin. " The storm clouds are gathering
for a significant surge in the highly transmissible
variant nationwide. The critical
unknown, however, remains the possibility
that omicron is far less severe than prior
coronavirus variants, " he offers. " Given
the contagiousness of omicron, case counts
FIGURE 1
U.S. Crude Oil Inventories (MMbbl)
550
may peak within the next month as the
variant races through the population. But
from a crude demand perspective, even
if near-term demand weakens as a result
of omicron, it appears possible that lost
demand could rebound rapidly by the
latter half of winter. "
As the omicron cloud lifts, a burst of
optimism would help support WTI prices,
he goes on. " By late spring, with the seasonal
peak of the coronavirus in the
rearview mirror and recent SPR releases
already absorbed by the market, oil may
move sharply higher. " Rubin says.
While acknowledging that elevated
inventories and rising supplies from the
Organization of Petroleum Exporting
Countries plus Russia during the next
three months may dampen bullish sentiment
at the start of 2022, it likely will
not persist for long. " A renewed global
economic rebound, firm supply/demand
fundamentals, and a crude market that
has absorbed a new coronavirus variant,
an ill-timed SPR release, and steadily
rising OPEC+ production will likely be
poised to turn significantly higher into
summer and the back half of 2022. "
Oil Price Projections
How high could prices conceivably
go under the right circumstances? Late
2021 saw a pair of major U.S. investment
banks predict that oil prices could top
500
Five-Year Range
450
400
350
Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec
2020
5-Yr Avg.
2021
JANUARY 2022 39
American Oil and Gas Reporter - January 2022

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