 US oilfield activity is still below “sustaining” levels, but picking up quickly on higher prices and likely to continue to do so  US supply to fall 0.3mbd y-o-y in FY21, but start to trend upward again in the second half and be up 0.6mbd in 2022e  Brent forecast raised to USD56/b from USD52/b, 2022 unchanged at USD60/b Onshore activity still below “sustaining” levels... We have seen a big increase in US tight oil activity in recent months; the last reported total of 518 well completions in December was more than 50% higher than the lows of mid-2020, but still less than half the number in 2019 and as recently as Q1 2020. It was also maybe 30% below what we think is needed just to sustain volumes at current levels, and we expect the effects of this to be seen in a gentle decline in US supply in the next few months.

…but rising rapidly: So far, the signs are encouraging that the industry’s muchimproved capital discipline is being sustained, but the boost to cash flows from higher prices should allow activity levels to continue to recover. By the second half of 2021, activity could reach levels that allow supply to start trending upwards again. We now expect a full-year decline in US liquids supply of only 0.3mbd in 2021 (vs 0.7mbd previously) and full-year growth of 0.6mbd y-o-y in 2022.

Permian dominance: Prior to 2020, tight oil growth from non-Permian basins was already faltering, with growth increasingly Permian centric. The downturn accelerated this trend, with the Permian contributing 70% of rig additions since September and capex in the basin set to make up 64% of the US tight oil total in 2021. We expect flat Permian production y-o-y in 2021, but for the other major basins to show declines.

Still a big swing factor, but less so in 2021: US tight liquids has been a major swing factor in global supply/demand balances in recent years, and given its scale (at more than 11% of global supply) and relative price sensitivity, it will remain so. But this year, its effect at the margin will be far less significant than the recovery in global demand, and the supply response from OPEC+. We think H2 2021 demand could be as much as 5-6mbd higher than in Q1 but against this, the OPEC+ agreement (plus the voluntary Saudi Arabian cut) is currently keeping ~8mbd of supply off the market.

Raising our 2021 price forecasts, but risks are still plentiful: We raise our 2021 Brent forecast to USD56/b from USD52/b (with Q1 at USD57/b) due to increasing signs of the market rebalancing, but our longer term price of USD60/b is unchanged.

We are concerned that prices may have run too far in the short term. OPEC+ restraint is succeeding so far in keeping the market tight in the face of demand uncertainty, but there are real risks its agreement starts to fray in the face of higher prices, while the market may also have to accommodate a return of significant Iranian exports in 2021.