As demand for oil picks up, OPEC discipline will be tested
“THE ASKS the image showed clear signs of improvement. So said Abdulaziz bin Salman, Saudi Arabia’s energy minister, at a virtual meeting of the Organization of the Petroleum Exporting Countries (OPEC) on June 1. The cartel and its allies, foremost Russia, have been hit hard by the covid-induced recession, which pushed global oil demand from nearly 100 million barrels per day (bpd) in 2019 to 91 million last year. In a frantic effort to prevent a collapse in prices, OPEC+, as the group calls itself, agreed to cut production in early 2020. Yet it has failed to prevent the price from dropping below $ 20 a barrel (see graph).
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Today, the cartel believes that demand for oil is finally on the right track to recover. Ministers agreed to increase supply by around 450,000 bpd in July, as part of their plan to restore nearly half of production cuts made last year. Saudi Arabia, which has the lowest production costs and the most unused capacity in the cartel, and often acts as a back-up producer, has said it will also soon reverse a unilateral production cut of $ 1 million. barrels per day performed earlier this year.
In response, the benchmark Brent crude price rose above $ 70 per barrel on June 1 for the first time in two years. Several indicators confirm the view that demand for oil, an indicator of economic growth, is taking off. Oil stocks, which soared last year, are down sharply. The International Energy Agency, an official body, estimates that global demand for oil could return to pre-pandemic levels within a year. In America, gasoline demand jumped over Memorial Day weekend at the end of May, a solid start to its summer “driving season”.
OPECThe celebrations could still prove to be premature. A price drag could be Iran, where production has been held back by US sanctions. Speculation that negotiations to relaunch a deal on Iran’s controversial nuclear program may soon progress have proven to be unfounded. The delay means that additional Iranian oil is not about to suddenly flood the market. But if a deal is struck somehow this summer, analysts estimate Iranian exports could increase by 1 million barrels a day or more by the end of the year.
Additionally, while tight inventories and high demand will push prices up in the short term, those same prices will make US shale oil producers, who currently restrict investment, to spend. Saudi Arabia may also have a harder time keeping OPEC disciplined, observes David Fyfe of Argus Oil, a specialized journal. Members tend to stick to agreed-upon discounts when demand slumps, but rising prices encourage cheating.
Greater worry, says Paul Sheldon of S&P Global Platts, an analytics company, is “an unexpected drop in demand” in 2022. America and China are back to their energy-consuming habits thanks to the spread of vaccines; Europe is not left out. But energy demand in India and Latin America, where the pandemic is still raging, remains fragile. Mr. Fyfe points out that long-haul transport is another source of weakness.
The most serious threat to the cartel comes from technological change. There are widely divergent views on how quickly demand for black products will give way to greener fuels, even among the oil majors. But oil suppliers will almost certainly find a world with carbon constraints. Edward Morse of Citigroup, a bank, gives a more subtle point on innovation. Oil could climb to $ 80 a barrel in the near term, but this is hardly the start of a “new secular bull run”: as the global cost of oil research and development has fallen by more than half over the past five years to reach $ 10 to $ 15. per barrel, he estimates the fair value of crude to be $ 40 to $ 55. The “clumsy cartel”, as Morris Adelman, an energy economist, has dubbed it OPEC, is ready for a rocky ride. ■
A version of this article was posted online on June 2, 2021
This article appeared in the Finance & Economy section of the paper edition under the title “Le cartel maladroit”