Thursday, December 7, 2023

Oil climbs as OPEC+ may delay further supply recovery if there is a slump in demand

The sun sets over an oil well in the Gulf of Mexico, US.

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Oil prices climbed on December 3 after the Organization of the Petroleum Exporting Countries (OPEC), and oil producing allies led by Russia, a grouping known as OPEC+, said it is prepared to adjust its strategy to reflect changes to the supply-demand equation. The new Covid-19 strain Omicron has sparked fears about a global demand slowdown.

“The oil market is interpreting that as saying that OPEC+ may delay further oil supply recovery if there is a slump in demand,” Chris Weafer, co-founder of Macro-Advisory in Moscow, told NE Global on December 3.  In effect, OPEC+ has drawn a support line under the oil price, he added.

Brent futures rose $1.53, or 2.2%, to $71.20 a barrel by 11:45 a.m. EST (1645 GMT), while US West Texas Intermediate (WTI) crude rose $1.14, or 1.7%, to $67.64, Reuters reported on December 3.

“The speed at which governments hit the panic button over Omicron spooked the oil market,” Weafer said adding that it was a knee-jerk reaction based on a safety-first approach rather than fact or evidence based. The price of Brent fell from $82 per barrel set on November 24, to $69 per barrel on December 1 as a direct result of the various government panic actions. “But traders are also quick to both lock in profits (Brent started this year at only $50 per barrel) and to try and shake out nervous holders so they can add more cheaply,” he said.

“Of course, one cannot say with any degree of conviction what will happen next with the pandemic and what may be the effect on economic activity and oil demand, but based on what we have seen so far, the initial panic move was excessive,” Weafer said, adding that there will be some hit to demand but relatively little and nothing like we saw in mid-2020.

According to Weafer, another support factor is that the recent oil price sell off will hurt sentiment in the US shale sector more than in any OPEC+ country. The sharp decline from $86.75 per barrel on October 22 to $69 in early December is already reported to have rattled investors in the US shale sector, he said, noting that the slowdown in US investment and in shale recovery will suit OPEC+ and the oil market very well.

On November 23, the Biden Administration announced plans to release 50 million barrels of oil from the Strategic Petroleum Reserve. Asked about the US led action to release oil from strategic reserve, Weafer said it is cosmetic politics as the White House is under pressure because of rising inflation and rising fuel prices. “This move allows the President to tell Americans that he is being proactive and that was an important message ahead of Thanksgiving,” he said.

“But history shows that releases from strategic reserves only have a short-term impact and usually support the price afterwards. The reason is because it shows a measure of desperation by governments and there is only a limited amount that can be released. Usually governments move relatively quickly to restore any oil released – and more often they have to pay a higher price to do that!” Weafer said.

He noted that in fact, the reason why the US Northeast did not see pump prices rise during the Thanksgiving holiday was not because of the strategic reserve announcement but because Russia sent 4 tankers full of petrol and diesel to the Northeast of the US that same week. The 4 tankers contained 2 million barrels of refined products. In addition to this “one-off” Russia is the second largest supplier of crude oil to the US, now averaging some 800,000 barrels per day, Weafer said.

Justin Urquhart Stewart, co-founder of Regionally in London, told NE Global by phone on December 2 the release of oil from the US Strategic Petroleum Reserve tends to have a very marginal effect. “It has an emotional impact but in terms of overall scale it can be small in comparison and relatively short term. It’s not going to press the price down a great deal. The emotion of that has already had an impact. I see as a reasonable chance we could be going back to seeing a squeeze on it particularly if we are going to be additional pressure on energy production in Europe. We are looking at potential blackouts at the moment because of gas issues in Italy and I think that concern could easily wash over into the oil price as well,” Urquhart Stewart said.

“I think a combination of increased demand because of obviously winter coming through and the emotional effect that has had on the economy the potential there is going to be a partial lockdown – it doesn’t look that’s going to be the case but the fact that’s the first next variation of the virus that we have seen but the combination of potential blackouts in Italy and shortages in western Europe now tie this with the geopolitics of (Russian President Vladimir) Putin and Ukraine and Belarus and the Polish border and I think  it would be interesting to see if the bear’s paw is going to be on the gas tap again,” Urquhart Stewart argued.

Weafer said the price of Brent still looks more likely to trade in the $75 to $90 per barrel range in 2022. This is because oil demand is still edging up and it would take a major global lock down – of the sort that no government wants to agree – to change that trend, he said, adding that demand is still likely to recover to the pre-covid peak of 100 million barrels per day in the fourth quarter of 2022.

Moreover, US oil production is rising slowly and will soon peak because of the tighter regulations as the White House looks for ways to deliver on its climate promises and because of ever greater pressure on oil producers and their investors/banks by well organised environmental groups, Weafer said.

Also, the price of Brent still looks more likely to trade in the $75 to $90 per barrel range in 2022 because OPEC+ has again made clear that it will act to prop up the oil price if there is a danger of it falling “too low” …. it now seems that “too low” is $70 per barrel Brent, Weafer said.

He noted that Moscow is very happy with the oil market right now. It has cut the budget breakeven for crude to under $60 per barrel for this year so will report a big surplus and the target is to get the breakeven down to mid $40s per barrel within the next couple of years. “The Kremlin is also happy because of the large volume of oil, and product sales to the United States. Kind of makes it more difficult for the White House to be too critical of the Kremlin when Russian oil is an important part of the US energy mix … and it will remain so given the implications for the US oil industry of the emission targets set by the White House,” Weafer argued.

For his part, Urquhart Stewart said there is an increasing chance that oil prices will be pushing up towards $90 per barrel even higher than that. “It just depends on what happens to the squeeze,” he said, adding, “A few days ago, I would say that not at all possible. My attitude has now changed and I’m much more bearish about it”.

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


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