OPEC+ Faces Calls to Cool Oil Market Frenzy With Extra Barrels
(Bloomberg) - From trading houses in Geneva to Wall Street banks, much of the oil world agrees that global markets could consume more barrels. The big question is whether OPEC + will deliver enough of it.
A gross flood that accumulated during the pandemic is quickly disappearing. According to Morgan Stanley, global inventories are falling the most in two decades. Prices have soared to pre-virus levels while US production has been hit by freezing storms. Talk about whirlwinds of market supercycles and even the $ 100 return of oil.
Given the apparent need for more supply, traders expect the OPEC + coalition, led by Saudi Arabia and Russia, to agree to increase production when it meets on March 4 to address some of what was done last year To reverse production cuts.
However, it is unclear whether the group will act forcefully enough. The Saudi energy minister Prince Abdulaziz bin Salman was aware of the ongoing threat to the virus from demand and urged fellow producers to "remain extremely cautious".
If the alliance agrees to an increase in production that does not meet the requirements, however, this could trigger a further increase in prices - and the group would be forced to grapple with its undesirable consequences.
"There is a real risk that they will unduly tighten the market," said Bill Farren-Price, director of research company Enverus and an experienced observer of the cartel. "It's already very tight and if OPEC just focuses on keeping prices up, it will ultimately provoke supplies to its rivals."
The Organization of Petroleum Exporting Countries and its allies saved the global oil industry from an unprecedented slump last year by cutting production as the coronavirus crisis squeezed demand. The strategy has revived the international benchmark for Brent crude oil to $ 67 a barrel and boosted revenues for the troubled producer economies.
The 23-nation coalition continues to idle just over 7 million barrels of daily production - about 7% of global supply - and will decide on Thursday whether to revive a 500,000-barrel tranche in April. In addition, the Saudis will confirm whether an extra million barrels they recently took offline will return as planned.
Recovery of demand
The global oil markets are signaling that they can comfortably absorb the full 1.5 million barrels.
Demand in China, the world's largest oil importer, is back above pre-virus levels, as containing the disease allows much of normal life and economic activity to resume. Another major customer, India, warns that high prices are jeopardizing the global economic recovery. Due to the cold weather, fuel consumption in Japan, the fourth largest consumer of oil, saw its first year-over-year increase since mid-2019.
In the US, inventories of crude oil and refined products are back at levels last seen a year ago. Although the demand for aviation fuel continues to decline, the purchase of products that are suitable for work and home consumption - like diesel for trucks and plastics - is booming.
OPEC's own data shows that they can continue the planned production increases this year and still manage to deplete global oil supplies and bring them down to their five-year average - the group's desired target - by August.
The futures markets testify that deliveries are narrowing sharply.
Short-term Brent contracts have a sizable premium called backwardation in later months. The six-month spread is $ 3.22 per barrel. This reflects a "persistent, strong short-term deficit" of around 2 to 3 million barrels per day, according to Giovanni Serio, global head of market analysis at Vitol Group, the world's largest oil trader.
The shift to a tightening market has sparked a wave of bullish forecasts.
Goldman Sachs Group Inc. expects Brent to hit $ 75 a barrel in the third quarter as a new commodity super cycle looms, while trading giant Trafigura Group says it is "very bullish" over the coming months. Socar Trading SA, a unit of Azerbaijan's state-owned oil company, predicts that it could hit $ 80 this summer and three digits within two years.
"The fear is that there will be a shortage in 12 months," said Hayal Ahmadzada, Socar's chief trading officer, even if OPEC + revives production. "It's going to drive the price very high, very quickly."
It is still unclear what exactly OPEC + will decide.
Russian Deputy Prime Minister Alexander Novak has signaled that the country wants to continue with an increase and stated on February 14th that "the market is already balanced". Saudi Arabia sounds more cautious and urges its colleagues to remember the “scars” of last year's collapse.
Prices are still well below the levels most OPEC countries need to cover government spending, and the International Energy Agency - a leading forecaster - expects a market setback in the second quarter as a seasonal lull temporarily leads to re-stocking .
If Riyadh is looking to limit the overall size of the group's surge, it has a strong bargaining chip: the pace it chooses to return the additional 1 million barrel cut that is slated to expire at the end of next month.
But for some in the market, the kingdom should instead open the taps wide. If prices are kept high, US shale investments will only get back on their feet, bringing a flurry of new offers that undo the hard work of OPEC.
Even the full 1.5 million barrels are not enough to meet demand, says Jan Stuart, global energy economist at Cornerstone Macro LLC.
"The market needs more - but I don't hear anyone talking about it anymore," said Stuart. "There is an acute need for oil. The most obvious risk is that they keep holding back too much oil."
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