Crude Oil Commentary - 1/20/2023
Chinese crude consumption grew at a rate of 4.8% from 2011 – 21 but was down in 2022 as imports fell by 0.9%. Oil only accounts for 19% of the country’s primary energy consumption, however, ahead of natural gas at 9%. In contrast, coal accounts for ~55%, leaving substantial room for replacement. Despite China’s plans to build 150 new nuclear reactors over the next 15 years, 53GW of existing nuclear capacity appears small relative to 70GW in thermal capacity additions in 2023 alone. While China also announced 100GW of solar and 65GW of wind additions in 2023, solar’s load factor ranges from 10-25% while wind’s is in the 30% range. As a result, gas and oil will likely keep growing at a brisk pace and expand their role as reliable baseload power. Looking at developments in the U.S., total oil production grew 7.7% Y/Y in December and is expected to grow by 10.1% in January before further accelerating to 12.6% in February. Continuing to lead production increases, the Permian is producing at a rate of 5.636m bbl/day with solid growth also coming from the Bakken region. Scott Sheffield, CEO of Pioneer Natural Resources, expects the Permian to ultimately peak at 6.5m – 7.5m bbl/day, meaning there continues to be upside. Looking for production growth, executives surveyed by the Dallas Fed signaled more willingness to spend in 2023. 25% of respondents aim to increase capital spending ‘significantly’ in 2023 with 39% of respondents planning to increase spending ‘slightly’. In the grand scheme of things, global E&P spending remains subdued relative to prior spending cycles, though. Pioneer estimates that current upstream E&P spend is 45% below 2012 – 2014 levels. Interestingly, OPEC projects its own market share to decline from 36.34% in 2022 to 35.60% in 2028. While those numbers are dynamic, it will be interesting to find out how much spare capacity is left.