Disconnect between oil supply and demand
Climate talks do not negate immediate and short term need for crude oil
By Carly Fields
The contrast between the international climate talks taking place in the UK this week and the OPEC+ meeting taking place on Thursday could not be starker when it comes to the promises and demands of at least one developed country.
On the one hand, President Biden has urged action on climate change alongside a pledge that the US will lead by example on climate change mitigation measures. Then on the other, the US president is urging the Organisation of Petroleum Exporting Countries-plus group to pump more oil to support working class families on their commute to work.
Recognising the contrary motion of those two statements, Biden acknowledged at a news conference that while climate targets must be there and be worked towards, the shift to renewable energy will not happen overnight. “It's just not rational,” he said. So, the need for OPEC+ to agree greater oil production increases at their regular monthly meeting on Thursday is still necessary, regardless of the ruminations of COP26.
However, while there is pressure on OPEC+ to give an adrenaline shot to output to take the pressure off oil prices, there is widespread resistance to sizable increases
However, while there is pressure on OPEC+ to give an adrenaline shot to output to take the pressure off oil prices, there is widespread resistance to sizable increases.
ING head of commodities strategy Warren Patterson and senior commodities strategist Wenyu Yao noted that members continue to resist a larger increase in quotas and instead seem set on sticking to their plan of increasing output by 400,000 barrels per day (bpd) per month.
Two members - Angola and Nigeria – have publicly supported this more cautious approach. “It makes sense that these two countries would support the more cautious approach,” said Yao and Patterson. “They have generally struggled to increase output and both are pumping below their agreed production levels. Therefore, if they can't increase output, it makes sense to want higher prices.”
A Reuters survey of preliminary OPEC production numbers for October revealed that the group increased output by just 190,000 bpd over that month to 27.5m bpd. This was short of the increase previously agreed and the uptick was largely driven by Saudi Arabia and Iraq. The 23-nation OPEC+ grouping is reviving Covid-shuttered supplies in modest increments of 400,000 barrels a day each month. “Continuation of this strategy guarantees adequate supply and it has proved it’s effective in maintaining the markets’ balance and stability,” Kuwait's oil minister Mohammed al-Fares said in a statement on state-run KUNA press agency.
The alliance is said to be wary of pumping too much oil in case of renewed setbacks in the battle against Covid-19. ING’s Yao and Patterson noted that another factor holding back the group is uncertainty over if and when Iranian supply could return to the market. “Iran nuclear talks are set to resume this month and the group would not want to increase output if there is the potential for higher Iranian flows,” they said.
The alliance is said to be wary of pumping too much oil in case of renewed setbacks in the battle against Covid-19
Oil prices are hovering around the $85 per barrel mark for both Brent and West Texas Intermediate crudes, up more than 60% this year alone as oil demand recovers from its Covid-enforced drop. Russian President Vladimir Putin has intimated that a $100 per barrel oil price is a possibility.
Against those pricing concerns, the US is not alone is calling for more oil to be released to the market. However other nations have reportedly been reluctant to make their requests public in light of timing of COP26.
China has already taken action having decided to release oil products from its state reserves to meet domestic demand. The country’s National Food and Strategic Reserves Administration said last week that China would release state oil product reserves to the domestic market to offset a supply shortage and stabilise prices in certain regions. Neither the actual volumes being released nor the regions being targeted were stated.
The US could follow in China’s footsteps and release oil from its Strategic Petroleum Reserve to counter what it perceives to be insufficient supply from OPEC+. US domestic oil production has been steadily falling since it peaked towards the end of 2019. In August it stood at 11.14m bpd, according to the U.S. Energy Information Administration.
Oil demand is rapidly recovering, leading to the claimed disconnect between global supply and demand. Energy producer BP has reported that global oil demand is now back above the benchmark level of 100m bpd – a level last seen before the pandemic. “Somewhere next year we will be above pre-Covid levels,” BP chief financial officer Murray Auchincloss said on a conference call.
This is backed by research from Goldman Sachs who estimated in a research note that oil demand is nearing 100 million bpd, with winter seasonality and the recovery in international jet demand set to bring demand to record highs by early next year. This means a global supply deficit of about 2.5m bpd, according to Goldman Sachs, supporting a clear mandate to move more oil in 2022.