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Tightening supply-demand balances supports oil prices
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Balikpapan refinery: Through the Refinery Development Master Plan (RDMP) project, state-owned oil and gas holding company PT Pertamina will increase the capacity of its Balikpapan refinery by around 38 percent from the current 260 MBSPD to 360 MBSPD. This is part of Pertamina’s efforts to boost national energy resilience. (Courtesy of Pertamina)
O
il prices have gained around 10 percent since early October and prices are expected to be supported in the near term by easing recession risks and tightening supply-demand balances.
“Negative shocks on the global economy are gradually starting to wear off. Meanwhile, previously enacted policy support mechanisms are finding traction [...],” S&P Global Platts Analytics said in a recent report, adding that policymakers appear to be in control.
As oil demand growth stabilizes, supply is looking constrained. Increased refinery runs are expected to draw down stocks, the Organization of the Petroleum Exporting Countries (OPEC) is leaning toward extending its output cut agreement, and United States' shale production is slowing. Moreover, the Saudis may exercise supply restraint in order to support prices ahead of Saudi Aramco’s initial public offering (IPO), and the slowing supply comes as China is importing record volumes of crude oil to support new refinery start-ups.
Brent futures have gained approximately 10 percent since early October, with the contract closing just above US$62 per barrel on Nov. 12 and Platts Analytics expects Brent to touch the $65 per barrel level before year-end.
Platts Analytics has revised lower its 2020 global oil supply growth outlook to 1.9 million barrels per day (bpd) on reduced expectations for US shale. Lower rig activity and ongoing capital discipline has constrained US shale production growth much faster than anticipated, it said, adding that it now expects US shale output to grow by 850,000 bpd in 2020, down from a previous forecast of 1.1 million bpd.
A similar sentiment was echoed by Scott Sheffield, chief executive officer of Pioneer Natural Resources, a prominent Permian Basin producer in the US. Sheffield said he expected activity in the Permian Basin to slow “significantly” over the next several years.
Several years of West Texas Intermediate oil prices largely in the $50s per barrel, despite higher levels in 2018, have “strained” balance sheets for oil companies, Sheffield said, adding that as a result, operators are highly focused on spending less on capital, paying down debt and returning more cash to shareholders.
