DTN Oil

WASHINGTON (DTN) -- Reversing earlier losses, oil futures nearest delivery on the New York Mercantile Exchange and Brent crude on the Intercontinental Exchange settled Tuesday's session mostly higher. Futures were underpinned by expectations for large draws to have occurred in U.S. commercial crude and petroleum product stocks during the week-ended Feb. 19, as weather-related power and water outages in Texas, Oklahoma, Kansas, and New Mexico disrupted production and refining and are seen undermining a recovery in U.S. shale output in the coming weeks.

A host of smaller Permian-focused shale operators revised lower their first-quarter production outlook on Monday, giving the first indications of the hit to the industry caused by last week's winter storm. Some of the crude production lost to Winter Storm Uri in Texas, New Mexico and Oklahoma may never return to the market due to the cost of restarting a marginal well, according to Andy Lipow, president of Lipow Oil Associates. Marginal wells known as stripper wells can only produce a maximum of 15 barrels per day (bpd) of oil but account for nearly 19% of total U.S. oil production. Furthermore, a recovery can be constrained by soaring prices for steel and other metals used in pipes and wells.

Trafigura Group estimates roughly 40 million barrels (bbl) in oil output was lost in February, mainly from the Permian basin, with 1 million bpd of production possibly permanently shut-in.

Unplanned production losses in U.S. shale fields are compounded with a recovery in global oil demand, prompting major commodity funds and investment banks to revise higher their price outlook for the second and third quarters. Morgan Stanley estimates the global market has been 2.8 million bpd undersupplied, production versus demand, in January and February. If sustained, the first quarter could turn out to be the most undersupplied quarter since at least 2000.

This followed similar revisions from Goldman Sachs and Bank of America, with both seeing the price of Brent crude in the ballpark of $70 to $80 by midsummer.

"I will not be surprised if we see $80 a barrel in summer or before year-end and above $100 a barrel in the next 18 to 24 months," said Hayal Ahmadzada, Socar's chief trading officer.

He added that the Organization of Petroleum Exporting Countries and allies, which includes Russia, will likely taper production cuts and return to pumping crude at full tilt soon. Even so, it won't be enough. Even with Saudi Arabia and Texas producing, "the fear is that in 12 months there will be a shortage," he said. "It will drive the price very high very fast."

As a result of last week's shortfall, U.S. crude oil inventories are likely to have declined by a hefty 4.9 million bbl, according to analysts, with estimates ranging from a decrease of 10 million bbl to an increase of 3.1 million bbl. Gasoline stockpiles are expected to have fallen by 3 million bbl from the previous week and stocks of distillates are seen to have been drawn down 4.4 million bbl. Refinery runs are likely to have declined by a steep 8% to 75.1% of capacity, as the brutal winter storm in Texas forced several refineries to shut. Forecasts range from decreases of 17.5% to 1.1%.

After back-and-forth trade for most of the session, West Texas Intermediate futures for April delivery finished flat at $61.67 per bbl and front-month Brent futures on ICE gained 13 cents to $65.37 per bbl. NYMEX March ULSD future were up 0.94 cent to $1.8680 per gallon and the front-month RBOB contract gained 1.69 cent to $1.8586 per gallon.

Liubov Georges can be reached at liubov.georges@dtn.com