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The sharp rally in East of Suez sour crude prices opened the arb from the west, with several Urals cargoes heading east. But after weakening somewhat, Dubai, Oman and other eastern sours have started to recover as the Brent-Dubai spread has widened. The Brent leg is being supported by Chinese buying of North Sea cargoes after China imposed a 5% tariff on US crudes and the delay to the start-up of the Johan Sverdrup field to late October. Both sour and sweet crudes are strengthening, but sweets are rising more, and rightly so with IMO around the corner.
But flat price remains stuck, overshadowed by macro concerns (and producer hedging). While fears about a global demand slowdown are justified, apprehensions about an imminent US-Iran deal, the lack of liquids stock draws as NGL builds are overshadowing huge crude draws, and the impending surge in US output and exports as new pipelines are starting up are not legitimate.
In particular, US production growth has disappointed significantly, with crude output rising by just 7 thousand b/d per month in H1 19 compared to market expectations of 0.15-0.20 mb/d m/m growth. Well productivity gains have started to fall, with some basins even suffering from outright declines. The parent-child well issue and the growing lightness of US output are also headaches.
Moreover, amid strict capital discipline, companies have shifted capital away from drilling new wells to completing previously drilled ones (DUCs). DUCs in the Bakken and DJ basin are at five-year lows. At the current rate of completions (520 wells per month), we calculate the Permian will have exhausted all 2,500 of the good quality DUCs by early Q2 20. So, there is growing downside risk to our 2020 US crude output forecasts (+0.9 mb/d y/y), which should support flat price.
|Fig 1: Permian DUCs, thousands of wells||Fig 2: Average IP rates, y/y change, %|
|Source: Energy Aspects||Source: Energy Aspects|