Vandana Hari is the founder of Singapore-based Vanda Insights, which tracks energy markets.
The alliance of OPEC and non-OPEC oil-producing countries slashing production since last year amid a COVID-induced crisis is cause for celebration. Its efforts, coupled with a strong recovery in demand for oil from reopening economies in recent months, have nearly quadrupled crude prices in just over a year.
But the best part of this success – and probably the most difficult – is that producers ensure that it is inclusive, sustainable and, most importantly, does not become a formidable headwind for countries and countries. regions still struggling to shake off the yoke of the brutal pandemic.
While oil is part of a larger commodities rally that has accompanied the global economic recovery since late last year, there is one crucial aspect that stands out. Unlike a host of metals and agricultural products that are becoming more expensive due to production and supply disruptions resulting from COVID-related constraints, the supply of crude has been deliberately limited.
As a corollary to this, the 23-member OPEC + alliance, which controls nearly 40% of the world’s crude oil supply, has the ability to cool runaway prices by opening the taps a little more. Worryingly, he seemed reluctant to do so, allowing Brent to drop from $ 51 a barrel in early January to nearly $ 75 by mid-June.
Since the start of 2021, OPEC + has adopted a tone of extreme caution, adding far less supply to the market than it telegraphed at the end of last year. OPEC’s mainstay, Saudi Arabia, has dominated monthly energy ministers’ political meetings, constantly expressing doubts and even skepticism about the sustainability of the demand recovery.
The kingdom’s Energy Minister, Prince Abdulaziz bin Salman, has drawn media and market attention not only for the cohesion and discipline exhibited by a heavy confederation of nations, but also for having prevailed against the a relatively conciliatory non-OPEC heavyweight ally, Russia, which would be happy to release more oil on the market.
Abdulaziz has also flexed his considerable oil muscle, pulling the market back by declaring an additional one million barrels a day of voluntary Saudi production cuts from February to April. He has stood firm against sharp criticism from Dharmendra Pradhan, India’s Energy Minister, Saudi Arabia’s second-largest crude customer, through a series of tit-for-tat public rhetoric.
For the most part, however, Abdulaziz’s scathing admonitions have been directed at speculative traders, starting with his widely cited warning last September that he will have short sellers of oil “growing like hell.”
Speculators are now on the other side of the fence, stacking bullish bets on crude. But soon, Abdulaziz’s clients could be the ones who “can like hell”.
The oil market has gone from massive oversupply during widespread lockdowns last year to persistent undersupply in recent months, causing crude prices to soar. The US shale industry, once a formidable competitor of OPEC, is not closing the gap either. It is unlikely to return to growth until 2022, taking the time to recover from last year’s injuries, adapt its business to the post-COVID era and bring back disappointed investors.
Meanwhile, demand in the United States, the world’s largest oil-consuming country, has increased with a full reopening, as major European economies begin to follow suit.
Asia, where COVID vaccination rates are relatively low compared to developed Western countries, presents a mixed picture. Although China was almost back to normal last year, commodity inflation has started to compress its smaller manufacturers, and worried Beijing has taken action in recent days to try and calm it down with a series strict political measures.
India faces an uphill battle to get its recovery back on track after a severe wave of a pandemic rocked the country in April and May, forcing further lockdowns.
Several countries in Southeast Asia remain in the grip of their most severe waves of the pandemic and may not be able to completely end the restrictions for several months, thanks to a slow pace of vaccination.
It’s not just emerging Asia – even Japan remains in the grip of high infection rates, prompting continued extensions of the borders.
Gasoline prices in the United States are expected to increase an average of 41% during the current summer driving season compared to last year, according to the country’s Energy Information Administration. But higher fuel prices cannot derail America’s economic recovery or squeeze consumers like they will in middle-income or poorer countries.
OPEC + denies having a target price for crude. He says he sets his course based on estimates of the global balance of supply and demand and changes in oil inventory levels. He focused on evacuating the massive glut that built up during last year’s lockdowns.
The surplus is already gone, some analysts say, as an OPEC + technical committee recently predicted it would disappear by the end of July. At this point, OPEC + will still hold back 5.8 million barrels per day of supply, nearly 60% of the unprecedented reductions it launched in May 2020.
This oil must start to return to the market, and quickly, to avoid hurting consumers struggling to get back on their feet and governments trying to revive economic growth under the looming shadow of a lingering pandemic. While inflation is to be expected in an easy money environment, we don’t need oil to add to that pressure, if it can be avoided.
Even bigger tests await OPEC. The forecast of $ 100 of crude in the next few years, thanks to a collapse in upstream investments, is already shaking emerging economies with rapidly growing energy consumption. That Saudi Arabia and Russia remain committed to oil and gas spending offers some comfort. But as global capacity becomes increasingly concentrated in fewer and fewer hands, these producers will have to show that they are capable of balancing the common good with nationalist interests.