The national average price of gas per gallon is more than a dollar higher than the average price per year … [+] before. Gasoline prices will be displayed on a sign outside a Conoco station in Denver on Friday, November 5, 2021. ( – photo / David Zalubowski)
The current oil market is unusual. The Covid-19 pandemic has created turmoil and upheaval in the global economy, and the energy sector is no exception. Not only is this a US problem, energy markets are global, and while America remains a top producer, many other things are h -pening in the market.
Today we find ourselves in a situation in which global oil demand is r -idly recovering to pre-pandemic levels due to widespread vaccinations in the largest oil and gas consuming economies (USA, China, Europe). Life is returning to normal, with greater mobility and traffic patterns.
Worldwide consumption of all refined products, with the exception of kerosene, is practically back to pre-pandemic levels. Aviation fuel continues to be held back by restrictions on international flights, but on gasoline, diesel, heating oil, etc.
So we have noticed that the demand is increasing. What about oil deliveries? OPEC + has had the offer firmly under control since it agreed to its historic agreement to cut production in May 2020. Not only has it tried to balance supply and demand when the world is out of the pandemic – it has also tried to bring oil supplies back to normal levels.
The oil reserves shot up massively in 2020 amid peak lockdowns. So OPEC + ‘s task in the last 16 months has been twofold – withholding enough supply to
FILE – A man wears a face tag while fishing near docked oil rigs on Friday, May 8, 2020. … [+] in Port Aransas, Texas. Energy prices have risen in recent months as the economy reopens after the COVID-19 closings. Crude oil prices have soared more than 60% this year amid strong demand and tangled supply chains, leading President Joe Biden to pressure Saudi Arabia and other exporters to increase oil production after the pandemic cuts. ( – Photo / Eric Gay, File)
Meet demand but not oversaturate the market and ensure global stocks of both crude and refined products are drained. That requires exceptional delivery discipline, and the Saudi-Russia-led cartel has delivered. OPEC + has been so successful that oil prices have risen steadily since Brent fell below $ 20 a barrel at the height of the pandemic in spring 2020.
OPEC + has started easing supply cuts by adding 400,000 barrels a day every month. Global inventory levels are now near “normal” pre-pandemic levels, but OPEC + is currently reluctant to add more supply despite major consumer nations such as the US, J -an and India pushing them to do so.
Why is OPEC + not adding another offer despite prices of over USD 85 per barrel? Because she remains suspicious of the demand in the coming months and 2022. She remains concerned about new Covid-19 outbreaks, particularly after the experience with the Delta variant and its potential to dampen demand. Just look at what’s h -pening in Eastern Europe and Russia right now – new outbreaks have resulted in new lockdowns or mobility restrictions.
OPEC + also knows that the recent surge in Brent prices to over $ 85 was caused by the global rise in natural gas prices. The rise in gas prices is based on fears of a cold winter in Europe and Asia, but prices could fall sharply if colder than normal weather does not occur. Currently, there is a feeling that some power producers who can switch from expensive gas as a raw material will switch to oil products this winter, which could increase oil demand by 400,000 barrels per day to 1 million barrels per day.
OPEC + also has its eye on the oil market in early 2022. Winter could bring more Covid cases and spring is a “shoulder season” with lower demand. Adding another supply above the 400,000 barrels per month could result in an oil surplus in early 2022. OPEC + does not want to go back to point one with reducing inventory levels.
While most experts predict that global oil demand will return to pre-pandemic levels of over 100 million barrels a day next year, much of the heavy lifting will be done in the second half of the year. The summer months in the northern hemisphere – the so-called peak driving / flying season – account for a large part of the growth in demand each year.
What can we expect from OPEC + at their next meeting on Thursday, November 4th? The cartel is expected to stick to its current arrangement and not add more shipments than the previously agreed 400,000 barrels per day per month. CEO Saudi Arabia has already said that he sees no demand for additional barrels in the physical market. It has also cut prices on Saudi “spot” barrels – a move that reflects this. Yes, the oil markets are tight – but there is no shortage of oil for global refiners.
One thing OPEC + could address is that it has added less than the agreed 400,000 barrels a day in the past two months. It exceeded its supply pact because some weaker members, mainly from West Africa – Nigeria and Angola – were unable to produce their quotas due to operational, technical and investment issues. The larger cartel producers like Saudi, Russia or the United Arab Emirates could step in and fill this void, which could increase supply and possibly take something away from prices.
OPEC + is likely to test how high prices can go without harming the global economy while waiting to see when higher prices result in a non-OPEC production reaction. After all, the members benefit immensely from higher prices in their oil-dependent national budgets.
What about the USA? Why is slate not responding to higher prices with solid growth? While U.S. production is increasing and will continue through the end of 2022, it remains well below pre-pandemic levels of 13 million barrels a day. US production is now just over 11.1 million barrels a day – up from 10 million barrels a day at the height of the 2020 Covid-19 price drop. That’s a strong rebound. The US Energy Information Administration expects an average production of 11.3 million barrels per day in December, which would average 11 million barrels per day in 2020. Production will continue to rise in 2022 and will expire next year at around 12 million barrels per day, which is an average of 11.7 million barrels per day. That’s significant growth – but it remains 1 million barrels a day below its pre-pandemic peak.
What is explicitly preventing US producers from drilling and fracking more, with prices of 85 US dollars and some experts reckoning with 100 US dollars soon? It is mainly investors’ demands for higher financial returns. Environmental, Social, and Governance (ESG) concerns have also been weighed – and are building as the Biden government releases its climate plan. Prior to Biden’s arrival, there were investor demands for higher yields from slate. They were triggered by the massive c -ital destruction by shale producers in the years leading up to the pandemic.
MIDLAND, TX – Workers extracting oil from oil wells in the Permian Basin in Midland, Texas. (Photo … [+] Benjamin Lowy / Getty Images)
When prices fell a year ago, these demands were exaggerated. The same could be said for ESG. Those concerns existed before Biden, but his climate policy sends a stronger message to producers and investors about Washington’s reluctance to remain a leading oil and gas producer. So now, ESG concerns have been fueled by Biden policies like the termination of Keystone XL, an attempt to halt federal oil and gas leasing sales, and aggressive efforts to regulate methane emissions.
The other concern of producers is that oil futures markets are in “backwardation” – a market structure where prices are months and years later than current prices. That means investors expect lower prices in the future, which means $ 85 oil may not hold up, making it riskier to increase investment in new wells and fracking.
Why is the Biden government asking OPEC + for more supply when the United States has extensive reserves and remains a world leader? Biden has to tackle two somewhat contradicting agendas at the same time – rising energy prices in the short term and climate change in the long term. He’s gr -pling with rising energy prices – gasoline pump prices soared over $ 1 a gallon to a seven-year high during his tenure. But it cannot be viewed as oil-friendly by the progressive wing of the Democrats either when it comes to promoting domestic production. The net result is guidelines that look hypocritical.
In 2019, U.S. crude oil production averaged 12.3 million barrels per day. US crude oil production … [+] then fell to 9.7 million barrels in May 2020. From October 1 to October 29, 2021, US crude oil production averaged 11.4 million barrels per day based on weekly data.
US Energy Information Agency
On the one hand, the government is right to use OPEC NOW for more supply, as OPEC is sitting on over 6 million barrels per day of free production c -acities that can be ramped up quickly. The same is not true of the fragmented US oil sector, where hundreds of companies have to decide whether to seek growth and move the needle to all US production. The US oil sector cannot do this as fast as OPEC +. It is more of a process for US industry to mobilize and increase production.
On the flip side, Biden continues to send messages to industry and the world that they want to increase reliance on OPEC + and imports – this remains optimistic for short to medium term commodity prices. This solidifies the problem of high energy prices that the administration is faced with. Merely shifting greenhouse gas emissions from oil and gas to OPEC + does not combat climate change and at the same time harms the US economy. Globally, such measures are likely to increase emissions as industrial activity will move to less regulated areas with higher emissions in OPEC +.
The question is, why is the administration not promoting production and increasing emissions regulations at the same time? Such a strategy would displace the need for imports and lower prices at the pump. Look no further than Norway, the largest producer in climate-conscious Western Europe. The EU takes climate goals more seriously than the United States, but insists that its oil and gas sectors continue to develop, not be phased out. Given that they are among the lowest carbon barrels in the world, this makes a lot of sense. The Biden government can easily regulate domestic production – but it cannot easily do the same for foreign production.