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APPEC: Trafigura sees no US shale growth until end-2021 amid 'enforced sabbatical'

Highlights

US shale output falls to 1.5 million b/d net deficit

China oil stocks rise by 800 million barrels since start of 2019

China will need two years to clear excess oil stocks

Tokyo — Trafigura, one of the largest exporters of US crude oil and refined products, does not expect to see any growth in US shale production until the end of 2021, as the shale patch has entered "an enforced sabbatical" amid the coronavirus pandemic, Ben Luckock, the company's co-head of oil trading, said Sept. 14.

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"We have a change in supply dynamics," Luckock said at the 36th Asia Pacific Petroleum Virtual Conference, dismissing views suggesting the demise of US shale. "It's not dead -- its just on an enforced sabbatical."

During the coronavirus pandemic, the US shale industry has taken a bit of a breather, he said.

Referring to Trafigura's forecast in February, Luckock said: "Like most people, we were expecting solid US production growth this year [of around] 700,000 b/d," adding that the company's forecast was from taking particular realities of shale as a starting point.

"You need to replace 4.3 million b/d of production each year just to stay flat against that, we expected there to be around 5 million b/d of new production coming on. You will be in a net gain of 700,000 b/d -- that's what we thought pre-coronavirus."

Trafigura's US shale production outlook has flipped to a net deficit.

"The complete collapse in spending means that we now only expect 2.8 million b/d of new production to come on," Luckock said. "But the underlying 4.3 million b/d decline doesn't change. So, now we are left with an estimated net deficit of about 1.5 million b/d. That's a massive change to our balances."

The trend of new US shale production not offsetting the natural decline continues into next year, he said, adding that Trafigura does not expect to see growth until the very end of 2021.

"Until then, we are about 2 plus million b/d lower than we were expecting," he noted. "But the good news is, as with all sabbaticals, they must come to an end and normal service for the shale patch will ultimately resume."

US-China crude flows

The frayed relationship between Washington and Beijing has and will likely continue playing a major role in the US-China crude trade dynamics.

"We have the emerging and escalating strategic competition between China and the US," Luckock said. "Regardless of who wins this November's [presidential] election, the competition between these two sides appears to be something we are going to be seeing for some time, albeit perhaps with a different flavor depending on who is in the White House."

He noted that China should be taking large volumes of US crude to meet its ever-growing needs under "normal" circumstances, but this wasn't really the case earlier in the year.

Also weighing on US-Asia crude trade flows for some time will be the extraordinarily high inventory levels globally, with China effectively doubling its crude inventories since the start of last year, rising by some 800 million barrels, Luckock said.

"Even if demand does rebound to a level that is 1 million b/d higher than 2019, that still takes two years to work off this excess material," he said.

Despite the high inventory levels, China is expected to ramp up US crude imports over the next few trading cycles as Beijing steps up efforts to comply with the Phase 1 trade deal it struck in January with Washington.

China's crude imports from the US surged to a record high of 26.9 million barrels in July, jumping 82.6% from the previous high of 14.73 million barrels in January 2018, data from China's General Administration of Customs showed.

The volume was estimated to cross 30 million barrels in September to hit another high, according to data intelligence firm Kpler. The country is poised to receive about 115 million barrels over July-December based on the recent buying pace, the data showed.