There has been a sharp run up in the price of oil as economies around the world reopen. Whilst the pandemic and lockdowns continue to impact air travel, many more people are driving and goods continue to flow by sea and land. Oil demand is recovering rapidly from the depressed levels of 2020, and may be back close to 2019 peaks by early next year.
OPEC cautious about increasing supply
The oil price has flown up from around $40 last autumn to $76 today. Rising demand from the low levels a year ago has met with restricted supply. At the peak of its efforts, OPEC and their friends cut output by nearly 10m barrels a day. This week OPEC and Russia discuss continuing some of the production curbs until at least next spring, with the intent of keeping the market undersupplied in order to boost prices. So far this tactic has worked and some of the excess stocks seen a year ago have been reduced. US stocks have fallen for the last six weeks as more people take to their cars. Worldwide stocks are around the typical average of 2.9bn barrels.
OPEC is expecting demand to pick up by 6m b/d this year and to reach 100m b/d in 2022. Gradually the 10 m b/d cuts are being reduced, with Russia and some of the OPEC states keener than Saudi Arabia to pump more. US production is forecast to be around 11 m b/d, down from the 12.9m b/d peak in 2019 when President Trump was willing on the expansion of the shale oil industry. Current higher oil prices are expected by the US to lead to an increase in US output to 11.8m b/d next year. Russia is currently producing at 10.5m b/d and could increase if OPEC approved. Saudi has only been pumping at 8.5m b/d, imposing an extra cut on its output to help boost prices. Venezuela’s production is a tiny 0.5 m b/d, reflecting the troubles of a hyperinflation-ridden economy, whilst Libya has got back to 1.1m.
China is concerned about the rising price of oil and this week the state removed three executives from the National Petroleum state company for importing crude oil and selling it to independent refiners. The state wants to cut imports to counter some of the shortages in the market. It may reduce its demand by at least 300,000 b/d. Were there to be any breakthrough with Iran that led to dropping sanctions there would be more Iranian oil around, but news from the talks suggests they are some way off the agreement.
Green agenda poses challenge
Meanwhile, the major oil companies struggle to divest themselves of oil and gas assets and to pose as green paragons. Shell is seeking to exit joint venture oil and gas production in California, whilst both Shell and Chevron are seeking to sell oil and gas reserves in Texas. A lobbyist for Exxon was tricked by Greenpeace into claiming the oil company was cynical about green policy, arguing for a carbon tax they knew would not be imposed. The company moved quickly to deny these claims; that it said one thing in public whilst lobbying for another behind the scenes. It also faces allegations about its attitude to forever chemicals and its use of them.
Oil prices likely to stay higher for longer
It looks likely that OPEC can keep the oil market tight for a bit longer. The longer-term threats to the oil companies remain, as they seek to divest oil and gas holdings whilst still relying primarily on fossil fuels for their profits and dividends, and as they juggle their storylines about green matters. We should know later today if OPEC agrees to a modest cut of say 500,000 b/d which will keep the market tight. They are also arguing over whether to continue production controls after April next year, drawing on what they see as the success of their Declaration of Cooperation over the pandemic period. Sustained and higher oil prices rely on continuing cartel disciplines with output running below demand for longer. This seems likely for the time being.
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