After three weeks of losses the oil complex finally made amends and gained some traction. The move higher was not unreservedly convincing, nonetheless developments over the past five trading sessions did not indicate any souring of investors’ sentiment either. Perhaps, the euro weakness, caused by the headway made by far-right French political parties in the European parliamentary elections and the resultant escape into the dollar was the major impediment that capped the weekly crude oil gain at around $3/bbl. The considerable swelling of US crude oil inventories and the Fed’s pragmatism and wariness of cutting rates too hurriedly (or slowly for that reason) also acted as a brake on further price gains. Further weakness is observed this morning due to sluggish Chinese factory activity.

These factors, however, were dwarfed by encouraging financial data out of the US and by the elevated confidence level that global oil inventories are set to plunge as the summer season gets under way in the northern hemisphere. US inflation is cooling, albeit at a snail’s pace. Consumer prices rose less than anticipated in May and the latest weekly initial jobless claims data showed a cooling labour market. Although the medium-term forecast from the IEA envisages swimming pools filled with crude oil, the immediate future looks tight. For the second half of the year, with disciplined OPEC+ market management, global oil inventories are set to decrease. Perhaps the strengthening crude oil structure and the impressive improvement in Brent CFDs values are the harbinger of rising refinery demand. The G7 loan for Ukraine from frozen Russian assets and the disturbing inability of Israel and Hamas to strike a deal that might pave the way to a truce at least tacitly increased the geopolitical temperature providing further price support. There is a lot to ponder, yet if, and it is a sizeable ‘if’, the market genuinely buys into the updated oil balance prognosis then the upside bias will persist in the foreseeable future.

Wave of Consolidation

Everywhere one looks, it is obvious that oil producers are rather upbeat on the future of oil. The jury is very much out whether the transition from fossil fuel to renewable energy is gathering pace or slowing down, but recent estimates, short and medium-term, suggest that those in charge of supplying us with crude oil see potential in staying in business for decades to come. The latest updates on oil balance indicates that whilst next year’s growth in non-OPEC+ supply will be somewhat below what is observed in 2024, it will still be considerably over 1 mbpd with OPEC being the most pessimistic at 1.12 mbpd and the IEA the most upbeat with an annual rise of 1.45 mbpd. The latter expects this trend to continue throughout 2030, which will be discussed in detail in tomorrow’s note.

Because of the perceived shiny outlook on the supply front, interest in exploration and production has been on the ascent and the M& A sector has been undergoing a renaissance of late, too. Oil production from Guyana marched relentlessly higher, it grew by an annual average of 98,000 bpd between 2020 and 2023, the third fastest-growing producer outside non-OPEC. Portugal’s Galp announced encouraging results from Namibia in April, which helped its share price increase significantly. Additionally, output from Brazil and Norway is set to increase by healthy clips. And the US shale sector is also seeing a flurry of activities.

Last year exploration and production companies spent $234 billion in real 2023 dollars on mergers and acquisitions in the US, EIA data shows. It is the highest level since 2012 when deals worth around $280 billion went through. These include ExxonMobil’s acquisition of Pioneer Resources worth $64.5 billion, Diamondback’s purchase of Endeavor Energy in a $26 billion deal, Occidental’s $12 billion move for privately held CrownRock and Chevron’s merger with Hess worth $53 billion, which was signed off by Hess shareholders, although is still waiting for regulatory approval and facing an arbitration case with ExxonMobil and China’s CNOOC, who are Hess’ partners in the Stabroek project in Guyana.

In a way, the US shale sector has come a full circle. With the birth of the industry in the first half of the 2010s limitless funding from investors was available under the mantra of ‘growth at any price’. Crude oil production jumped by 140%, from 5 mbpd to 12 mbpd between 2008 and 2019. The pandemic, climate change and talks of peak oil upended the status quo, however. Money stopped flowing, shareholders demanded to see a return on their investments and shale companies were forced to switch to a ‘leaner-and-meaner’ modus operandi. It has inevitably led to consolidation, which is embodied in the recent M&A deals. According to Citi, the most prolific shale region in the US, the Permian Basin, is now dominated by five companies who have control over half of the resources there.

This wave of consolidation and the resultant and seemingly unbroken faith in demand for crude oil foresees solid US production. Between 2020 and 2023 the average annual growth in crude oil production was 170,000 bpd in the US, the highest of any non-OPEC+ country. And the future is equally, if not more, promising. Shale output grows reliably, almost on a monthly basis. The EIA sees 2024 domestic production growth at 310,000 bpd accelerating to 470,000 bpd in 2025 and reaching 13.71 mbpd, proving those who thought the pre-pandemic summit would never be scaled profoundly wrong. JPMorgan puts the same figures at 362,000 bpd and 395,000 bpd. We will never know how the US shale sector would have performed if the devastating virus had not escaped from the Chinese laboratory or market in 2019 in Wuhan but what the recent spate of mergers and acquisitions imply is that non-OPEC in general and the US in particular will remain a major headache for OPEC and its allies as the former will not shy away from taking advantage of the latter’s output policy as long as the price level makes it economically beneficial.

Overnight Pricing

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