Saudi oil cut fails to impress. Is a crude slump coming?
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If Saudi Arabia had been hoping that its unilateral decision to slice 1 million barrels off its daily production at the latest OPEC meeting would bolster oil prices, which have for most part remained below US$75 per barrel in the past two months, it has been sadly mistaken.
To be entirely fair, oil prices did climb some 2.5% on the news, but that was off prices closer to the US$70/bbl mark, which just further underscores how little impact the move had on the market.
And there are good reasons why.
Reuters reported that portfolio investors have become increasingly bearish about the outlook for oil prices with hedge funds and other money managers selling the equivalent of 32MMbbl in the six most important petroleum futures and options contracts over the seven days ending on May 30.
This was driven by renewed concerns about a slowdown in the global economy and associated fall in oil consumption.
The attempt by Saudi Arabia to move the market certainly isn’t new given the broader move by OPEC+ in April to slash production in an effort to create what’s essentially an oil deficit and boost prices.
While this effort led to a heftier spike in crude oil prices, they certainly didn’t last very long with the market dipping to the relief of consumers (almost) everywhere.
US shale oil producers also seem to have joined in on this effort (but not really) with FxPro senior market analyst Alex Kuptsikevich noting that the latest data from Baker Hughes showed a drop of 15 oil production rigs operating in the US to 555 – the lowest since April 2022.
“Since the start of the year, US production has been close to 12.2M BPD, which is only a modest 2.5% higher than exactly a year ago. Thus, US producers are in no hurry to take the market share that Saudi Arabia and Russia are willing to give up,” he noted.
“There are two reasons for this. Firstly, producers need to be more impressed by prices. Technically, they are near the 2018 peak, which is not low by historical standards. But here, one must add significantly higher market interest rates and a pronounced green agenda of financial institutions.
“Secondly, the apathy of the major oil producers could result from lower demand in key areas, forming a bearish market environment.”
Kuptsikevich added that while the market has thus far bounced back from levels that could trigger a big sell-off – about US$70.80/bbl for Brent crude and US$67/bbl for West Texas Intermediate – it was still good to be cautious when prices approach these levels.
On the other side of the equation, sustained low crude oil prices could lead OPEC+ to make further production cuts at its next meeting though there are certainly limits to just how much they can actually cut before it becomes unsustainable.
Commerzbank analyst Barbara Lambrecht suggested to euronews that Saudi Arabia’s reasons for keeping oil prices elevated could be due to its need to balance its budget.
The Middle East’s biggest oil producer has been spending billions on ambitious projects aimed at diversifying its economy away from oil.
Barring a sell-off that will send prices crashing, such cuts are likely to keep crude prices at or slightly above current levels.
This will of course be welcome news to ASX juniors with oil production, as it would allow them to keep their finances on course.
Here are a selection of ASX-listed juniors with substantial oil production.
Austria-focused ADX Energy currently enjoys production of about 336 barrels of oil equivalent per day, a significant part of which comes from its Anshof-3 well though this is itself constrained by the rented early production system.
The company was recently awarded the crucial production licence for the Anshof oil field in Upper Austria and plans are afoot to drill the Anshof-2 and Anshof-1 production wells during the third quarter of 2023.
Both wells will be drilled from the same drill site as Anshof-3 and progressively target thicker reservoir intersections which are expected to deliver higher production rates from the 25km2 mapped Anshof structure.
Should these wells prove successful, the company will now only be able to increase its oil production, it would also be to convert a significant portion of its 3C (high estimate) Contingent Resource of 26 million boe into commercially viable Proved and Probable (2P)Reserves, which currently stand at 5.2MMboe.
ADX has also matured satellite prospects which it holds at 100% interest to drill-ready status and is reviewing Prospective Resource estimates.
Bass Oil currently produces over 130bpd of oil from its Cooper Basin assets, an increase from about 65bpd when it first acquired them.
Its efforts have also boosted 2P Reserves up from 200,000bbl to 388,000bbl.
However, this is likely to receive a big boost after the successful completion of the Worrior-11 workover confirmed the presence of attic oil in the McKinlay reservoir.
This is expected to increase oil production – with Bass targeting output of 500bpd by the end of 2024 – and convert existing 2C Contingent Resources of about 418,000 into reserves.
Bass also has oil production from its 55% operating interest in the Tangai-Sukananti KSO in Indonesia’s South Sumatra Basin.
This delivered total production of 6,021bbl net to the company in April.
Indonesia-focused Lion Energy has a small 2.5% stake in the Seram (Non-Bula) production sharing contract which granted it oil production of 2,747 barrels during the March 2023 quarter.
Operating costs were down at US$18.4 per barrel, reflecting the operator’s ongoing focus on production cost containment.
Cliff Head oil field operator Triangle Energy received revenues of $11.4m during the March 2023 quarter from crude oil sales in December 2022 and February 2023.
The company produced 53,871 barrels of oil during the March 2023 quarter, or about 600bpd.
Output is expected to increase by over 100bpd once Triangle completes the rehabilitation of the Cliff Head-10 well, which has been shut-in since the failure of the downhole electric submersible pump in September 2021.
Cliff Head currently has remaining 2P Reserves of about 720,000 barrels of oil.