Alaska Journal | Oil price forecasts clouded by COVID-19 uncertainty
Oil price forecasters mainly focus on two things: supply and demand. They watch the Middle East, follow world politics, follow industrial activity and other economic indicators. All of this can affect supply and demand. Now they are also monitoring medical records for COVID-19 infection rates.
Market participants in oil producers, buyers, traders and investors fear that rising infection rates will slow the global economy and dampen the recovery in crude oil consumption. It would unbalance the global oil supply – which OPEC + is steadily increasing – if demand declines.
This fear of too much crude and insufficient demand led to a 10% drop in oil prices in mid-August, before the market recovered its temperature, felt better and recovered to the bottom. end of the month at around $ 70 a barrel for Brent crude. .
Since then, the resurgence of COVID-19, particularly in Asia, has sparked renewed nervousness as OPEC + continues its plan to bring back 400,000 barrels per day of production each month until fall 2022.
And now the latest reports from the Organization of the Petroleum Exporting Countries and the International Energy Agency are adding to market mistrust.
OPEC analysts reported on Aug.31 that global markets may show excess supply next year. Due to weaker demand projections, analysts predict that supply could exceed demand as early as January, adding more barrels to storage than the OPEC + alliance has been striving to reduce throughout the year.
OPEC’s baseline scenario now shows that global crude stocks will reach 3.2 billion barrels by the end of 2022, about 10% above the 2015-19 average. An even more pessimistic scenario from analysts of the COVID-induced drop in demand shows 3.6 billion barrels in storage by December 2022, or the most in several years, aside from 2020 when storage tanks filled up and that the crude was parked on board tankers at sea.
OPEC analysts predict that global supply will exceed demand by more than 100 million barrels per month from January to May 2022, then continue at a lower level for the rest of the year.
“Unless demand for oil turns out to be much stronger or production outside the OPEC + group is much lower than OPEC analysts predict, the time will soon come when members will have to consider again. reduce, rather than increase, production, ”Julian Lee, oil strategist for Bloomberg, wrote in a Sept. 4 commentary. Lee previously worked as a senior analyst at the Center for Global Energy Studies, a London-based think tank.
“When that happens,” Lee said of the prospect of production cuts, “expect the old (and new) divisions (within OPEC +) to reappear,” and that the The alliance returns to “long and difficult” meetings between the 23 producing countries led by Saudi Arabia and Russia.
The International Energy Agency sees it in the same way as OPEC analysts. The IEA has lowered its forecast for oil demand for this year and predicts that supply may exceed demand by next year.
The agency said global demand for oil “turned sharply” in July due to “the worsening spread of the pandemic.”
The spread of the Delta variant of the coronavirus – coinciding with OPEC + continuing its plan to bring production back – will eliminate “lingering suggestions of a short-term supply crunch,” the IEA said.
“Growth for the second half of 2021 has been more sharply degraded, as new COVID-19 restrictions imposed in several major oil-consuming countries, especially in Asia, are expected to reduce mobility and oil consumption,” said the AIE in its monthly report. .
“We now estimate that demand fell in July as the rapid spread of the COVID-19 Delta variant compromised deliveries to China, Indonesia and other parts of Asia. “
Just two months ago, Goldman Sachs and others predicted oil would hit $ 80 a barrel by the end of this year. It seems less likely.
“The scale could revert to surplus in 2022 if OPEC + continues to reverse its (production) cuts and producers not participating in the deal increase in response to the price hike,” the IEA said in his report.
OPEC + is ready to suspend or even cancel its planned production increases if necessary to keep the balance between supply and demand, Saudi Energy Minister Prince Abdulaziz bin Salman said in August.
One figure that could help OPEC + avoid any changes in its production plans is that the alliance is actually pumping around 10 percent less than its overall quota, as some members – notably Angola and Nigeria, and some few Russia – have problems filling their allocations due to deteriorating production capacity from lack of investment or technical disruptions.
However, some OPEC countries are worried.
“The markets are slowing down. Since COVID-19 has entered its fourth wave in some areas, we need to be careful and reconsider this increase. There could be a halt to the 400,000 increase, ”Mohammad Abdulatif al-Fares told Reuters on the sidelines of a government-sponsored event in Kuwait, just two days before OPEC + decides on September 1. to continue increasing the planned production.
Oil-producing countries should be cautious about oversupply in the market, Fares said.
Last year, OPEC + implemented a record production cut of 10 million barrels per day, equivalent to around 10% of global supply, when energy use plunged due to the restrictions. travel plans and national lockdowns to counter the spread of COVID-19.
The alliance has slowly restored production and is expected to bring back all crude production by fall 2022. Unless COVID changes the plan.
“It feels like the Delta variant has taken over the oil market and the narrative here,” said analyst Patrick O’Rourke, of ATB Capital Markets in Calgary. “We were on the cusp of the re-emergence of the economy and the start of international travel. And the brakes were fully inflated on that, ”he told the Calgary Herald on Aug. 21.
“The OPEC + group faces a real challenge in the coming months of having to reduce supply, just as many members are anxious to open their oil taps further,” Bloomberg’s Lee wrote in his comment last week. .
Larry Persily is a former Alaskan journalist, state and federal official who has long followed oil and gas markets and projects around the world. He can be contacted at [email protected].