OPEC and Allies face balance between measured crude production and overly high prices
Energy shortages and price spikes suggest the world needs more oil to meet short-term global needs. How much more – and how quickly – remains a moving target.
With producers in Lower 48 hesitant to increase production in the wake of the pandemic, the Organization of the Petroleum Exporting Countries (OPEC) and its allies, aka OPEC-plus, are in the driver’s seat. They could either increase production to balance the market this year or pursue a measured approach to maintain upward pressure on prices to offset losses induced by coronaviruses last year. Cartel leader Saudi Arabia saw its 2020 oil export earnings nearly halved from the previous year, according to OPEC data.
This creates a balance between current profits and possible economic disruption if prices rise too high.
Prices for Brent crude, the international benchmark, eclipsed $ 83 / b in intraday trading on Tuesday, extending a rally from Monday and marking the highest level since before the pandemic. Brent prices have increased about 60% this year.
The rally developed alongside a global economic recovery from the pandemic which increased demand for travel fuels. It has been exacerbated by shortages of natural gas and coal needed for electricity and winter heating in many parts of Europe, Asia and South America. These emerging challenges have galvanized calls for gas-fired power plants to switch to oil, especially in densely populated Asia, where clean energy regulations are lagging behind other parts of the world.
With oil stocks still well below pre-pandemic levels, current supplies may not meet the additional demand, however. “We expect a tight global balance through the end of the year given the currently lower inventories,” ClearView Energy Partners LLC.
Saudi Arabian Oil Co., aka Aramco, said this week that the potential natural gas crisis has already boosted oil demand by 500,000 b / d, 100,000 b / d more than the pace of increases in the OPEC-plus. The cartel on Monday approved another production increase of 400,000 bpd for next month, continuing a plan launched in August.
“OPEC-plus projections predicted a supply shortfall until 2021, with the monthly supply injection of 400,000 bpd breaking the supply shortfall by the end of the year,” said Robert Yawger, director of energy futures at Mizuho Securities USA LLC. However, “500,000 bpd of fuel change would imply that the supply deficit could persist” until 2022.
Barclays oil strategist Amarpreet Singh said the market reaction this week “shows how tight the market is, reinforcing our view of asymmetric price action with upside risks biased at these inventory levels. “.
Is inflation looming?
Of course, rising oil prices spill over to business owners and consumers. This raises fears that inflation could derail the economic recovery and ultimately lower oil prices.
Raymond James & Associates Inc. chief investment officer Larry Adam said the recent “strong rebound in crude prices could change the story” and convince OPEC to take more aggressive production measures. He said inflation concerns are already high due to pressures from supply chain disruptions. High energy costs could force consumers and businesses to pull back and delay the investments needed to keep the economy buzzing.
The fact that large US onshore producers have committed to modest production levels until 2021, rather than taking advantage of higher prices, adds to the pressure on OPEC-plus. U.S. production remains more than 1.0 million bpd below the 2020 peak reached in March 2020 before the pandemic, according to data from the Energy Information Administration.
OPEC-plus officials said this week that their projections include expectations of strong economic growth through 2022 – robust enough to support high oil prices. This helps explain why they stuck with their plan to gradually align supply with expected demand.
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However, analysts expect that as long as output growth is modest, prices may continue to rise. Goldman Sachs Group analysts recently raised their year-end Brent price forecast from $ 10 to $ 90, noting that production increases continue to delay demand.
Rystad Energy analysts see the conditions in the same way.
“The brewing energy crisis has driven up commodity prices across the board and made oil and gas quite expensive for customers,” said Louise Dickson, analyst at Rystad. Because “demand signals are increasingly bullish, it is reasonable to talk about potentially bringing in more barrels than expected.”
Aware of the balances and the specter of galloping inflation, OPEC-plus “will certainly monitor the impact of high prices on sales, as well as the evolution of market balances until the end of the year”, Dickson added. “The speed with which the recovery of Covid is unfolding, the harshness of the winter, and the development of financial and money markets in the coming months may all tip the oil price balance … We expect more action from there. ‘OPEC-plus at the December meeting. “
However, if the balance were to tip even further to the bullish side, OPEC and its partners may need to increase output sooner to suppress inflation.
“As oil gets more expensive day by day,” Dickson said, “buyers need to re-evaluate how they are responding to such a sustained, bullish cycle that has not been seen since the so-called days of” super-cycle ”of raw materials of 2008 and 2011.. “