Oil is gaining again, but just how sustainable is it?

Crude oil prices have strengthened this week with the benchmark Brent oil now tracking above US$70 per barrel after OPEC and its associates expressed optimism about demand for the fossil fuel.

Commonwealth Bank quoted Saudi Arabia energy minister Abdulaziz bin Salman as saying that the “demand picture has shown clear signs of improvement”, adding that this belief appears to be supported by US gasoline demand rising to its highest level since the pandemic began.

It added that oil demand recovery is expected to continue with the US, Europe and China leading the way though the rise of COVID-19 cases meant that this pace would be uneven.

Declining expectations that US sanctions on Iran would be lifted has also alleviated concerns about some 2.4 million barrels of oil per day (MMbbl/d) entering the market.

Likewise OPEC+ has also reaffirmed it will stick with current production plans until the end of July.

“We think OPEC+ will continue to target oil production at levels that will keep oil markets tight,” Commonwealth Bank added.

“The group has certainly succeeded in bringing down global oil and product stockpiles.”

According, the bank noted that there is upside risk to its previous Brent oil price forecast for the fourth quarter of 2021 from US$65/bbl and that the benchmark is more likely to trade in the US$70/bbl to US$75/bbl range in the second half of 2021.

Sunshine and rainbows? Maybe not

Not everything is going oil’s way.

In his proposed US$1 trillion budget for the next decade, US President Joe Biden aims to end specific tax provisions that would have provided fossil fuel companies with US$35bn in benefits.

These include benefits for enhanced oil recovery, which strikes at the very core of the US’ shale oil sector; “intangible” costs such as wages, repairs, supplies, and other expenses for oil and gas drilling; and a provision that allows oil and gas companies to deduct as much as 15% of the revenue they receive from a well.

Separately, Rystad Energy noted that oil and gas countries are unlikely to see revenues from oil and gas hit the US$1 trillion mark again.

While oil and gas producers typically received combined revenues of more than $1bn from the fossil fuels prior to the COVID-19 pandemic, the Norwegian energy intelligence firm noted that accelerating energy transition meant that from 2022 onwards, their tax revenues will be limited to the low US$800bn range this decade.

This could tick up again to about US$900bn before plummeting down from that point.

On the topic of numbers, US oil companies are poised to see big losses this year after a decade of big profits. Just look at this screenshot from Commonwealth Bank.

Oil and gas ASX small caps

Red Sky Oil & Gas (ASX:ROG) is currently preparing to carry out an extended production test of the Killanoola-1 DW-1 well within its recently acquired Killanoola oil project.

This will allow the company to ascertain more about the quality of the oil, the reservoir and also test enhanced oil recovery solutions.

Once this test period is completed Red Sky will re-enter the well to perforate the newly identified 37 metres of potential pay. If successful, this should increase production rates significantly.

Pilot Energy (ASX:PGY) recently completed the acquisition of Royal Energy, giving it a 21.25 per cent indirect interest in the Cliff Head oil field in the Perth Basin off Western Australia.

During the March quarter, the field produced at a gross rate of 758 barrels of oil equivalent per day.

Over in the US, Brookside Energy (ASX:BRK) is drilling the Jewell 13-12-1S-3W SXH1 well that continues to intersect extensive oil and gas shows in the horizontal section.

This is the first of a potential five-year, 20-well development that could tap into a conservative prospective resource of 11.6 million barrels of oil equivalent.

88 Energy (ASX:88E) has also received some encouraging news from Merlin-1 well on Alaska’s North Slope.

Downhole sampling recovered evidence of oil with additional fluorescence recorded at previously unidentified depths.

Here’s how oil and gas stocks on the ASX performed over the last week and six months.

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