The Organization of the Petroleum Exporting Countries will evaluate its decision to limit oil production. The Organization of the Petroleum Exporting Countries (OPEC) gathers its members and ten allies for a meeting in which they will probably decide to increase production again to meet rising demand.
At the beginning of May the 23th, millions of barrels were left underground so as not to flood a market weakened by the pandemic of the new coronavirus. The OPEC began to reopen more taps of black gold in view of the improvement of the sanitary crisis. A gradual strategy planned until July. This policy and its possible extension from August onwards will be evaluated.
The OPEC will stick to the cautious timetable agreed in April. Russia, the leader of the allies, will likely try to pick up the pace as it has been doing since the beginning of the year. But it will be up against Saudi Arabia, a pro-cautionary heavyweight in the cartel that will be backing its position on the resurgence of COVID-19 infections in Asia.
Vaccines, Travel and Pre-covid Prices
Indeed, the market was shaken in May by a wave in India, the third-largest crude oil-consuming country behind the United States and China.
Despite the reimposition of travel restrictions in several Asian countries, which slowed oil consumption, demand should continue to increase with the intensification of summer travel in Europe and the United States thanks to the rapid deployment of vaccines in these regions of the world. The OPEC is positive about the increase in demand:
- Predictions made by the cartel were confirmed since the first week of May.
- They expect a rebound of six million barrels per day this year compared to 2020.
- They foresee an increase of 96.5 million barrels consumed per day on the planet.
This causes a global crude balance clearly in deficit according to JBC analysts. And it is having repercussions on prices, which have returned to pre-pandemic levels: the European barrel of Brent was close to US$70 on Friday and WTI was worth around US$66.
The Iranian Incognito
OPEC not only keeps a close eye on the demand for black gold, but also closely monitors the supply of its competitors, such as the United States, the world’s largest producer, and its own members, a bone of contention at the ministerial summits.
After four days of tough negotiations between the countries that wanted to maintain – and even increase – the cuts, as indicated in the road map agreed on last spring, and those who wanted to start opening their hands to collect more, the green light was announced by the government of Kazakhstan, one of the signatories. Members of the expanded Organization of Petroleum Exporting Countries ( OPEC) account for about 60% of global pumping.
The Effect of COVID-19 on Opening-up
The current health situation, especially worldwide vaccination, had consequences in the opening of the new oil tap. Even after the first doses were applied, the market was still under pressure from a cyclical weakness in-demand – aircraft on the ground, less use of cars, an industry that has not yet fully recovered – and the aftermath was a radical change in the energy community, in full transition from fossil fuels to renewable sources.
The pact between exporters adds some pressure on the supply side of an already very tense market and augurs that the price of crude oil will be kept at bay in the near future. At the same time, however, it is a small lifeline for the petro-states, which need to sell an increasing amount to rebalance their ailing public finances. And an opportunity to get rid of an ever-increasing volume of crude oil at a time when there are growing calls for billions of barrels to be left definitively in the ground as the only possible option to curb climate change.
Although the Russian company Rosneft is in a compromised situation as a result of the health crisis, with losses of almost 700 million in the third quarter of the year, most analysts believe it is better to deal with issues in Moscow than Riyadh since it has more opportunities. In all oil countries, however, the leeway has been squeezed to the limit: triple-digit prices are long gone and a significant part of the current pumping is simply not profitable.
The oil industry has been heavily affected by the global health crisis. The worst breaking point happened during the middle of April, where the pandemic was at its lowest. The price of Texas crude – the market benchmark in the US – went into negative territory. The announcements about the proximity of a vaccine against the coronavirus have helped: in the last month, Brent – the benchmark in Europe – has risen from around 35 dollars to around 50 dollars for each barrel. Oil prices reacted to the news with sharp rises.
- The Brent barrel, the benchmark in Europe, soars over 2% and reaches 80 dollars, its highest level since the end of 2014.
- The West Texas ‘black gold’, for the US market, rebounds more than 1.5% and stands at 72 dollars, close to highs of late 2014.
There has been a setback in the months of July and August, but producers believe that in September and October they are going to be close to 100% and, thus, the market is going to roughly balance supply and demand. The current prices are satisfactory for everyone. The balance between supply and demand must be ensured, and the supply will be sufficient once the long-term measures are taken.
Speaking at the press conference following the meeting, which was held behind closed doors at a luxury hotel in Algiers and lasted just a few hours, Al Falah added that the market outlook looks better than last year and that demand is expected to increase throughout 2019. This is why they need to invest in storage going forward. “An OPEC ministerial meeting will take place in Vienna next December” he stressed.