Demand revival boosting oil markets

Published December 20, 2020
Prices rose after the US Energy Information Administration (EIA) reported a decline in the US crude oil inventory by 3.1 million barrels for the week to Dec 11. — Reuters/File
Prices rose after the US Energy Information Administration (EIA) reported a decline in the US crude oil inventory by 3.1 million barrels for the week to Dec 11. — Reuters/File

Crude oil markets are on up. Prices rose after the US Energy Information Administration (EIA) reported a decline in the US crude oil inventory by 3.1 million barrels for the week to Dec 11. This gave a boost to market sentiments.

In the midst of all this, two opposing camps appear endeavouring to sway the market sentiments. Some are beginning to emit positive signals. The global oil industry needs some $12.6 trillion in investments through 2045 to meet the global demand, Secretary-General of the Organisation of Petroleum Exporting Countries (Opec) Mohammed Barkindo said at a videoconference.

This was despite the fact Opec in its monthly oil report had revised down its oil demand forecast for 2021 saying consumption will only increase by 5.9 million bpd, 350,000-bpd lower than its earlier projection.

The Paris-based International Energy Agency (IEA) is also underlining, sufficient long-term oil supplies “should not be taken for granted,” saying it was not clear if adequate investment in oil supplies “will come in time and, if it does come, where it will come from.”

Politically speaking, in its role as the OECD energy watchdog, overproduction helps the IEA achieve its objectives.

Norwegian consultancy Rystad Energy said in a report this month that the world would run out of the oil supplies it needed by 2050 unless there was a sharp rise in exploration. It said $3tr in capital spending was needed to tap 313 billion new barrels of oil from existing underdeveloped fields or from new undiscovered fields.

Energy consultancy Wood Mackenzie said existing discoveries needed investment to meet future oil needs. “Only about half the supply needed to 2040 is guaranteed from fields already onstream. The rest requires new capital investment and is up for grabs,” it added.

With global oil inventories declining due to the strengthening demand from Asia, Goldman remains bullish, expecting Brent to average $65 a barrel next year. Structural underinvestment in oil and gas will put upward pressure on oil prices, Goldman Sachs’ Jeffrey Currie told CNBC.

This may stimulate short-term demand for oil, Currie added, expecting it to rise over the next few years until the so-called green infrastructure is being built.

Commodity trading giant Trafigura also expects a strong rebound in oil demand next year thanks to mass vaccinations, which will push crude oil prices to $55-60 a barrel, Argus Media reported, citing the company’s chief economist Saad Rahim.

Oil prices, defined as an average of Brent, West Texas Intermediate, and Dubai prices, are expected to rise to an average of $44 per barrel next year and $50 a barrel in 2022, up from expected $41 in 2020, the World Bank said on Wednesday.

Yet, others are looking at things differently. “The peak of (crude) consumption may have already passed,” Russian Deputy Finance Minister Vladimir Kolychev told Bloomberg in an interview earlier this month. Getting prepared for this decline in demand, the Russian Finance Ministry is studying several scenarios for oil demand development over the long term, with different levels of demand decline, Kolychev added.

President Vladimir Putin was more blunt. Russia is successfully weaning itself off oil revenues, Putin said on Thursday, RT reported. “This means that, while we’re not completely there, we are nonetheless starting to get off the so-called oil and gas needle,” he added.

The possibility of lifting sanctions on Iran is also beginning to dampen spirits. Iran’s President Hassan Rouhani said on Thursday he was certain the incoming US administration will return to its nuclear deal commitments and lift crippling sanctions on his country. Iranian traders and some prospective buyers are already preparing for the US pressure to ease once Mr Trump leaves office.

Already there is a murmur in the market that the volume of Iranian oil reaching the global markets have gone up despite the Trump sanctions. In recent months, Iran has succeeded in circumventing the US sanctions and exported more oil to China and other countries. US-based TankerTrackers.com estimated Iranian crude oil exports hit 1.2 million barrels per day (bpd) over the fall, up from 481,000bpd in February, Benoit Faucon reported.

Libya also continues to boost production, with its average daily output hitting 1.28 million barrels. Only a few months back, its output was hovering at around 200,000bpd. Meanwhile, Baker Hughes’ latest rig count report for the US showed the most rig additions since January, fuelling the oversupply worry.

A number of spanners are in play. The current crude exuberance seems a bit premature.

Published in Dawn, December 20th, 2020

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