The oil price is caught between a short-term recovery and the medium-term prospect of peak oil, as countries ramp up programs to decarbonize by switching power generation sources and banning internal combustion engines (ICE).
The oil price has been seesawing between vaccine optimism and pandemic pessimism. Yet, it has managed a gradual recovery from its lows last year to around $50 a barrel now.
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Oil price recovers … but outlook remains muted
However, the oil price is nowhere near where most OPEC+ members would like it to be. It’s also not where shale producers need it to be to sustain capital raising for a return to growth.
However, the oil price could arguably have been a lot less. The price owes its current position to stoic management by OPEC+’s leading producers, Saudi Arabia and Russia.
Consumption still hasn’t recovered to a pre-pandemic level. Furthermore, it doesn’t have any prospect of reaching the levels projected for 2021 global consumption this time last year.
Demand destruction has come from three main areas, the Financial Times notes, none of which are likely to turn around anytime soon.
The first factor is jet fuel. Air travel is severely depressed and is unlikely to fully recover for several years. Current consumption is some 2.5 million barrels per day below pre-pandemic levels.
Meanwhile, the second factor is gasoline and diesel consumption, which will likely recover more quickly. Even so, it will likely not see 2019 levels this year.
The final hit is from a wider loss of industrial activity and lower levels of goods shipped by sea.
On the supply side
The implications on the supply side are potentially even more profound.
The collapse in the oil price has sucked the life out of capital investment. Projects are being postponed, shelved and, ultimately in some cases, producers filing for bankruptcy.
U.S. crude output has fallen from a record 12.3 million b/d in 2019 to 11.3 million b/d this year, according to the Energy Information Administration (EIA). However, the U.S. remains the world’s largest producer.
The Financial Times suggests the U.S. will fall further to 11.1 million b/d in 2021. Meanwhile, output outside of OPEC will rise by 0.5 million b/d. As a result, that leaves the onus on OPEC and its allies to manage the mismatch between supply and demand in the year ahead. That’s no mean feat, with several wild cards such as Libya, Iran, and Venezuela holding exemptions and having the potential to resume significant increases in supply.
Iran, in particular, could benefit from a potential nuclear refining agreement with the new Biden administration at some point this year, holding the potential for up to 2 million b/d of supply to resume.
The key to any rise in oil prices this year, even maintenance of the current level, will be how OPEC+ manages output.
The drawn-out pandemic crisis has left them with more than 7 million b/d of crude oil capacity still offline. They were expected to gradually return this output to market in a tapered wind-down of the curtailment starting with 500,000 b/d at today’s meeting. However, that now looks like it will be a longer taper than previously thought in the face of renewed lockdowns and a slow rollout of vaccine programs.
Oil bulls have much about which to be wary.
A renewed bout of price weakness is unlikely. The risk to the upside is limited. The pressure to take advantage of any significant price rise to repair drained budgets balance sheets will be immense this year. The real challenge for OPEC will be holding discipline together if demand picks up and prices firm further. The pressure to open the spigots and raise revenues will be more than some producers can resist.
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