OPEC + faces calls to cool oil market frenzy with extra barrels

From trading houses in Geneva to banks on Wall Street, much of the oil world agrees that global markets could use a few more barrels. The big question is whether OPEC + will provide enough.

A gross glut that accumulated during the pandemic is rapidly disappearing. Global inventories are plunging at the fastest rate in two decades, according to Morgan Stanley. Prices reached pre-virus levels, while US production was hit by freezing storms. Talk about the whirlwinds of supercycles on the market and even the return of $ 100 worth of oil.

With the need for a larger supply being evident, traders expect the Saudi-Russian-led OPEC + coalition to agree to increase production at its March 4 meeting, canceling some production cuts made last year.

Brent Downgrade Reflects Tightening Market
But it is not known whether the group will act vigorously enough. Wary of the virus’s lingering threat on demand, Saudi Energy Minister Prince Abdulaziz bin Salman urged fellow producers to remain “extremely cautious.”

If the alliance agrees to a production increase that does not meet requirements, it could, however, trigger another price spike – and the group would be forced to face its unwanted consequences.

“There is a real risk that they will tighten the market excessively,” said Bill Farren-Price, director of research firm Enverus and a seasoned cartel observer. “It’s already very tight, and if OPEC only focuses on price maintenance, that will eventually spur supplies to its rivals.”

The Organization of the Petroleum Exporting Countries and its allies saved the global oil industry from an unprecedented recession last year by cutting production when the coronavirus crisis hit demand. The strategy boosted the international benchmark Brent to $ 67 a barrel, bolstering the income of struggling producers’ economies.

The coalition of 23 countries continues to idle just over 7 million barrels of daily production – about 7% of global supply – and will decide Thursday to relaunch a tranche of 500,000 barrels in April. In addition, the Saudis will confirm whether the additional 1 million barrels that they recently took offline will return as planned.

RECOVERY OF DEMAND

Global oil markets are signaling that they could comfortably absorb the full 1.5 million barrels.

Demand in China, the world’s largest oil importer, is back above pre-virus levels as its disease containment allows much of normal life and economic activity to resume . India, another key customer, warns that high prices are jeopardizing global economic recovery. Driven by the cold, fuel consumption in Japan, the fourth-largest oil consumer, in January recorded its first year-over-year increase since mid-2019.

In the United States, inventories of crude oil and refined products have returned to near levels last seen a year ago. Although demand for aviation fuels remains depressed, purchases of products for work and home consumption – like diesel for trucks and plastics – have exploded.

OPEC’s own data shows it can move forward with planned production increases this year and still manages to deplete global oil stocks, bringing them down to their five-year average – the target desired by the group – by August.

Futures markets show that supplies are tightening sharply.

Short-term Brent contracts command a hefty premium over the following months, known as backwardation, with a six-month spread standing at $ 3.22 per barrel. This reflects “a sustained and strong short-term deficit” of around 2-3 million barrels per day, according to Giovanni Serio, global head of market analysis at Vitol Group, the world’s largest oil trader.

BULLISH CALLS

The move to a tightening market triggered a wave of bullish projections.

Goldman Sachs Group Inc. sees Brent hit $ 75 a barrel in the third quarter as a new commodities supercycle awaits us, while trading giant Trafigura Group says it is “very bullish” for the coming months. Socar Trading SA, a unit of the state-owned Azerbaijani oil company, predicts that $ 80 could be reached this summer and triple digits within two years.

“The fear is that in 12 months there will be a shortage” even if OPEC + relaunches production, said Hayal Ahmadzada, commercial director of Socar. “It will drive the price up very high, very quickly.”

It is still not clear exactly what OPEC + will decide.

Russian Deputy Prime Minister Alexander Novak signaled that the country once again wishes to make an increase, noting on February 14 that “the market is already balanced”. Saudi Arabia seems more reserved, urging its counterparts 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 – anticipates a market pullback in the second quarter, because a seasonal lull briefly causes a new accumulation of stocks.

If Riyadh wants to limit the overall size of the group’s increase, it has a powerful bargaining chip: the pace it chooses to return the additional one-million-barrel reduction that is supposed to expire at the end of next month. .

But for some in the market, the kingdom should rather open the taps. Keeping prices high will only rekindle investment by U.S. shale drillers, they say, and lead to a flood of new supplies that undoes OPEC’s hard work.

Even a full 1.5 million barrels is 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,” Stuart said. “There is a dire need for oil. The most obvious risk is that they will continue to hold back too much oil. “