Monday, December 4, 2023

Covid recovery, supply chain woes ratchet up oil prices

Green days coming bad news for black gold
The first pump station on Belarus territory of the Druzhba pipeline, near the village of Bobovichi, Belarus.

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Oil prices hit multi-year highs this week as Covid recovery and coal, electricity and natural gas shortages are fueling demand for crude.

“It has a direct knock off effect, so people have been securing future oil and current oil and that is squeezing the market again. The oil price will go up,” Justin Urquhart Stewart, co-founder of Regionally, a UK regional investment platform, told New Europe’s Energy Insider by phone on October 18.

The Covid recovery is also driving the oil price up. “It increases the level of squeeze and so put together with the breakdown of the rest of the supply chain, it was almost inevitable that people are trying to secure every other form of energy supply. Apart of that there is again an issue with the tankers as well,” Urquhart Stewart said.

Chris Weafer, co-founder of Macro-Advisory in Moscow, told New Europe’s Energy Insider on October 19 that after decades of false alarms, and alarming predictions, there is today no doubt that the oil industry has entered a terminal transition phase. “What nobody knows is what shape will be the transition and how long it will take. Five to 10 years seems too pessimistic for the oil market while 15 to 20 years seems too optimistic. The proponents of both are simply ‘talking their own book’ as there is no definite trajectory. Only scenarios,” Weafer said.

Against that backdrop it is better to look at the oil price in terms of short, medium, and longer term, Weafer said, noting that over the short term a key driver has been the recovery in oil demand as the pandemic impact eases. Most big economies have seen a return to 2019 demand.

The critical supply event was, and remains, the agreement of the Organization of Petroleum Exporting Countries and oil producing allies led by Russia, a group known as OPEC+, which took 10% out of global supply from the second quarter of 2020 and which is managing the return of that oil very effectively, Weafer said.

The slow return of US shale is important both for the supply side and the unity within OPEC. “The fact that the environment lobby is so active in the US, and supported by the White House policy agenda, means that oil operators are under more pressure to cut debt and return money to shareholders. They have fewer resources to invest in restoring oil production,” Weafer said.

Another key driver is the continuing US sanctions against Venezuela and Iran, which have also removed over 4 million barrels from global supply, he said, adding that also has helped OPEC+ to manage the market and to control the supply-demand balance.

Over the medium term, though 2022-23, the important known factors will include whether OPEC+ will continue to try to manage the oil price by adjusting supply to match any changes on the demand side. “If so, what price does OPEC+ target?” Weafer asked. He noted that Russia is using sub -$60 per barrel for its 2024 budget while Saudi and others in OPEC need over $80 per barrel, although that will be lower if volumes continue to rise, he said, reminding that OPEC+ is more important than demand trends if it continues to dynamically manage supply to match demand changes.

Another factor over the medium term is whether US sanctions stay to block Iran oil. “Allowing the 2 million barrels per day currently blocked, to return, would increase internal OPEC pressure and make its response to demand changes a lot less effective,” Weafer said.

Moreover, there is the question of US shale producers being able to ignore the climate action pressure groups and also add more oil.  “Here also, it will depend on how OPEC+ adjusts,” he said.

According to Weafer, over the short to medium term, the single most important factor is OPEC+. Producers within that group are set to make a lot of money over the balance of this decade if they can maintain the sort of unity seen in recent years.

Regarding the dynamic changes when considering the longer term, the key driver then, and by the end decade, will be progress in renewable energy technology and how fast energy sources change from oil to electricity or something else in the transportation sectors in developed economies and as a source of power in developing nations, such as India and Africa, Weafer said.

“By the early 2030s, this will be the key oil price driver rather than OPEC+ actions,” Weafer said, adding, “How those countries manage after that will largely depend on how they use the next five-year oil boom receipts”.

Meanwhile, Urquhart Stewart argued that Russia is keeping a tight grip on Europe’s energy market. He added that cold temperature in northern hemisphere and Chinese growth are also boosting oil prices. “Political issues here. Is there a Russian Bear paw on the gas tap which (Russian President Vladimir) Putin always denied but I suspect there is and will China take advantage of this as well to actually squeeze the West by putting the price up by increasing demand?” he asked. “You have to be very innocent to not believe there isn’t a Russian gas bear paw on the Russian pipeline. I think he has played this game before, and he is doing it again. That drives gas prices up and that in turn will knock on to oil,” Urquhart Stewart told New Europe, adding, “But what’s interesting thing is China itself is seeing a slowdown but actually the demand for oil is going up which is making me believe there are political issues here”.

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Co-founder / Director of Energy & Climate Policy and Security at NE Global Media


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