Crude Oil Prices Tick Higher, But Analyst Says Big Picture Is About Shale Reactivity

Crude oil prices are likely to continue to tick higher until we see U.S. shale oil reactivation displayed as a rising drilling rig count, according to one SEB analyst.

The 2020 oil crash and COVID-19 pandemic have had a huge impact on shale oil producers in North America, which require oil prices above $40 per barrel to sustain operations.

On Tuesday morning, Brent crude was trading at $44.84.

“There is clear potential for Brent at $60-80 per barrel in 12-24 months’ time, but the broader picture is all about shale reactivity,” Bjarne Schieldrop, chief commodities analyst at SEB, said in a note.

Shale reactivation might not occur until WTI crosses above $50-55 per barrel, the analyst said. 

Declining U.S. production is on the horizon for the next six months, along with restrained production from OPEC+ and sideways to gradually higher global oil demand, Schieldrop said. 

Watch Out For Second Wave Of COVID-19: A second wave of coronavirus is a high risk in the autumn, the analyst said. 

U.S. gasoline demand recovery is losing steam; OPEC+ is increasing production in August, with several members set to breach limits in September; and refinery margins are terrible, he said. 

“In addition, the Urals crude price is losing value versus Brent crude, while the Dubai crude forward curve has moved into contango following two months of front-end backwardation in a sign that the tightness in the medium sour crude oil market is easing as OPEC+ comes back with more supply of this crude slate.”

Shale Reactivity: The bigger picture is all about shale oil reactivity, as there is no "free flow of oil" from OPEC+ at this time, Schieldrop said. 

This leaves us with U.S. shale oil and its reactivity to oil prices, and the big question is when a visible rebound will occur in the U.S. shale oil drilling rig count, according to SEB. 

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