Crude oil futures have jumped to the highest levels in six weeks after U.S. President Donald Trump ratcheted up threats to slap Russia with extra sanctions and tariffs unless it agrees to a ceasefire with Ukraine. Brent crude for September delivery gained 1.2% to trade at $73.34/barrel in Wednesday’s morning session, while WTI crude was up 1.5% to $70.24. Trump told reporters that he would give Russia 10 more days to negotiate a truce with Ukraine, extending his earlier deadline to August 3 from July 14. Trump says he is not concerned about the impact of Russian sanctions on the oil market, probably because he reckons it will give an opportunity for U.S. producers to ramp up oil output.
“The new deadline caught many analysts by surprise and, if enforced, could tighten Russian crude and fuel supplies to the global market,” BOK Financial Securities wrote in a note.
Also driving oil prices higher was a trade deal struck between the U.S. and the European Union, that averted a full-blown trade war. The deal establishes a new baseline for commerce between the two economies, with the EU now facing a maximum 15% tariff on exports to the U.S.
However, a large U.S. crude inventory build acted as a counterweight.
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Commercial crude oil stocks rose by 7.7 million barrels in the week ending July 25, according to data released by the U.S. Energy Information Administration on Wednesday. Total stockpiles reached 426.7 million barrels, still 6% below the five-year seasonal average, but the size of the weekly increase surprised markets.
The EIA figures came one day after the American Petroleum Institute reported a smaller build of 1.54 million barrels, underscoring a notable gap between public and private data. While geopolitical headlines and trade news pushed prices higher, the unexpected surge in inventories helped limit the scale of the rally.
And now, commodity analysts at Standard Chartered have predicted that oil prices are likely to trend higher in the coming years. Current oil prices have remained close to $70/bbl in the post-pandemic period, and are roughly in-line with the 20-year average at $73.38/bbl. However, StanChart says the economics of U.S. shale that previously allowed oil prices to fall from the $90-100/bbl range in the runup to the Global Financial Crisis to below $60 per barrel have changed quite dramatically.
The analysts point out that the U.S. shale patch now needs higher oil prices to prevent a precipitous decline in shale oil output. Higher input costs for steel, labor, and frac materials, courtesy of Trump’s tariffs, are not helping, either. Indeed, we previously reported that, “the average breakeven price for Permian producers is now edging back toward the mid-$60s, up from the mid-$50s just two years ago.”
StanChart is not the only oil expert that holds this bullish view, with multiple energy analysts now sounding the alarm that oil prices at current levels are not sustainable. Back in May, Rystad Energy provided estimates that the breakeven price for new horizontal wells in key shale plays now hovers ~$68 per barrel, a sharp rise from just two years ago, “There’s an expectation of tight capital budgets and slower reinvestment — even if prices recover modestly,” said Artem Abramov.
Wood Mackenzie shares a similar sentiment, “This is not 2014. Investors want cash flow, not growth,” said Robert Clarke, WoodMac’s VP of upstream research. “If the price floor doesn’t come back, the rig count will absolutely fall.”
Well, maybe oil executives have communicated this harsh reality to Trump. Maybe they’ve warned him that his ‘drill, baby drill’ mantra will remain a mere political slogan as long as oil prices remain at these levels, hence his sudden antagonism towards Moscow. Indeed, U.S. rig count is going through a protracted decline, a precursor for falling oil production.
According to the latest Baker-Hughes data, the U.S. oil rig count fell for the 13th consecutive week, losing seven w/w to a 46-month low of 415, with the YTD decline now clocking in at 68 rigs. The latest fall was heavily concentrated in Texas where oil drilling fell by six w/w to a 47-month low of 212. Oil drilling in the Eagle Ford formation of south Texas fell by five w/w to 34 rigs, with overall basin activity supported by a three-rig rise to 14 rigs in gas drilling. Delaware Basin drilling fell by two to 146 rigs while, elsewhere in the Permian, Midland Basin drilling fell by one to 91 rigs and other Permian drilling was unchanged at 23 rigs. Meanwhile, the U.S. gas rig count gained five w/w to a 23-month high of 122, bringing the year-to-date increase in gas drilling to 21 rigs.
By Alex Kimani for Oilprice.com
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