Opec will not help the west

On Thursday, ministers from the Opec energy cartel met for their 27th conference, along with Russia and other Opec+ oil producers. As expected, no action was taken to increase supply.

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The wider grouping of Opec+ energy exporters said they will not increase supply despite rocketing prices. It settled for the planned rise of a little over 400,000 barrels a day of output.

Rumour has it that the advanced world has created plenty of bad will with Opec governments and producers through its net-zero campaigns and enthusiasms. Some Opec governments and companies are tired of being told their production is wrecking the world and should be gradually closed, only then to have the west seeking more output short-term because the price has gone up.

US-Saudi ties fray

The US has also lost traction with Saudi Arabia by attempting to revive a deal with Iran to gain access to its significant oil supplies. Saudi expects more support from its American ally, given the war it is fighting against rebels in Yemen that look to Iran for support. Recent Yemeni missile attacks on Saudi oil stores have added to the tensions.

As if accepting he had little influence with Saudi Arabia, President Biden announced ahead of the Opec meeting his plan to increase the sales of oil from the US Strategic Reserve to try to get prices down a bit on world markets. This was also seen by some in Opec as an unhelpful act. The volumes are not large enough to make a big impact on price levels. The US needs to keep some strategic reserve in these uncertain times. The 180,000 barrels to be released is a daily 1% increase in world output for six months, or under two days of total world supply. Oil prices are currently more influenced by the state of play over lockdowns in China, with the impact on demand that could have.

The wider [Opec] grouping does not want to fall out with Russia.

A west desperate to take Russian gas and oil out of their supply chains finds it difficult to get a sympathetic hearing when they would like to buy more oil and gas from non-Russian sources. Russia has long since been the leading member of the Opec+ group alongside Saudi Arabia from within the core of Opec. The wider grouping does not want to fall out with Russia.

Many advanced countries are doubling down on the wish to move quickly to reliance on electricity and renewables away from dependence on gas and oil for heating, industrial furnaces and vehicles. It is going to take time to scale the technologies available, and to improve and develop the embryonic technologies needed to complete a fast transition to an electric future.

The carbon economy continues

Industry forecasts suggest that the current global 100 million barrels a day of oil output and consumption is likely to prevail for the rest of this decade. It will take years to switch enough people from petrol, and diesel vehicles and from oil and gas heating. Growing demands for more fossil fuel from China and emerging-market economies will offset savings by advanced countries on their journey to net zero. The choosier the advanced world becomes about where this oil and gas should come from, the more tensions and price spikes there will be in these markets.

The US is in the strongest position, with a surplus of domestic gas at relatively low prices and the ability to cover much of its oil needs from domestic production. Europe is at a huge disadvantage, with little oil and gas available in the EU itself outside the Dutch gas fields. Germany and Poland have substantial coal reserves but there is still a wish to eliminate coal more quickly than gas from use for environmental reasons.

Gas markets a challenge

Gas is both a global market and a series of local and regional markets. Some gas is globally traded in the form of LNG. Some gas is traded across national frontiers within land-based regions through pipelines. Other gas, as with much US gas, is supplied and sold to a domestic market through a network of national pipes. Substantial volumes of gas need to stay close to home if there isn’t an export pipe or LNG conversion facilities to allow global sales and transit. Governments concerned to maintain good national supplies can block or delay attempts to put in international pipes or LNG conversion facilities to keep more of the gas in domestic markets.

Oil is a more globally-traded commodity, with plenty of shipping capacity to carry both crude oil and products. Countries need their own refinery capacity to take off the different fractions and products or they need trade access to those who do have these plants to transform crude. The balance of product supplied from crude depends in part on the crude used in refining, with lighter crudes yielding more higher value fuels, and with some refineries having more extensive cat cracking capabilities to produce lighter product.

The emerging world is likely to increase its use of fossil fuels including oil over this decade.

The main uses of oil-based products are in transport, where we are some way off replacement fuels for ships, trucks, heavy plant and planes. Oil is also an important source of petrochemical feed for the chemical industry. The emerging world is likely to increase its use of fossil fuels including oil over this decade for a wide range of uses, underpinning the forecasts of maintained levels of oil offtake.

Brent crude has been volatile, hitting $130 and sinking back to under $110 a barrel. The US will need to change policy and attitude towards Venezuela or Iran and then help them invest in more capacity if they wish to ease the pressures on world oil markets more significantly. This does not appear to be an immediate likelihood. Markets are going to have to live for longer with oil and gas shortages and supply dislocations.

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Opec will not help the west

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