The price of crude oil remains at high values, despite concerns related to the resurgence of the coronavirus with its variants, lockdowns, effects on mobility and demand in general. The relative strengthening of the US dollar has also only slightly damaged the stability of prices, supported by a decline in US reserves and by hopes related to the new anti-COVID vaccines.
However, the main factor driving the rally, bringing prices to the highest levels of the last 11 months is the decision taken on January 5 by Saudi Arabia, to voluntarily and unexpectedly cut production by one million barrels per day for the months of February and March 2021. A choice supported by many partners but in contrast with the strategy of Russia and the Emirates, which instead aimed at easing or eliminating the previously decided cuts.
Market in deficit
Yesterday evening Brent listed in London was 56.50 dollars a barrel, with + 9.25% from the beginning of the year, up by 190% from the 19.33 dollars reached in April 2020; the American WTI was quoted at 53.12 dollars with + 9.46% from the beginning of the year. For both values, the appreciation of the last month is around 14%.
The recent Saudi move should lead the oil market into deficit for most of 2021, according to analysts at JBC Energy, even if the new lockdowns slow down the evolution of demand. Riyadh’s medium-term goal is to bring the price to $ 80 for internal budget reasons. Meanwhile, the production cut was seen as «an act of goodwill by Crown Prince Mohammed bin Salman», said Energy Minister Abdulaziz bin Salman, who called the Saudis «guardians of the oil industry». The Kingdom’s production will therefore be 8.125 million barrels per day, ahead of the planned 1 million cut, and another cut is expected in March.
Global demand is currently around 78 million barrels per day, 20% less than normal levels. The new scenario has led UBS to forecast a price of around $ 60 for mid-2021.
As always, the geopolitical component in the Gulf also weighs, not only for the continuous attacks of the Houti militias from Yemen against Saudi targets, but also for the recent accusations by the US State Department of collusion between Tehran and Al Qaeda.
The peak of demand
The theme of «peak demand» is also on the market. The transition from fossil fuels to new forms of energy appears less intense and slower than expected, for economic and political reasons. The peak initially foreseen even for the two-year period 2019-2020 could slide to 2030 and beyond, due to the resilience of the petrochemical and transport industries, both heavy and light. The electric car is expensive, requires subsidies and the ecological issues related to batteries and material disposal are still far from being solved.
Another issue concerns refining: many refineries in Europe and the United States close and impressive plants are born in the Persian Gulf, in Russia and in Asia, from where the finished products will reach the West. The United States is also destined to lose refining leadership soon.
Among the factors to be considered for the evolution of the market in 2021, the attitude of the new US Democratic Administration towards the exploration and production of oil and gas is crucial. During the election campaign, both Joe Biden and Kamala Harris expressed a negative stance towards fracking and shale oil, whose operators are already in difficult conditions, announcing more stringent regulations.
Other aspects to monitor will be the resilience of OPEC + animated by differentiated strategies, the resumption of travel and mobility in general, and the ability of the sectors and areas hardest hit by the pandemic to recover from the crisis.
Investments languish
Also important is the trend in investments for plants, which have drastically reduced in the aftermath of the fall in prices in 2014 and 2015, up to 2020. Now exploration should resume and the question that is asked again is: is there a oil shortage on the horizon? The dominant theory states that potential new reservoir discoveries are decreasing as the amount of oil in the subsoil is limited.
In fact, this theory has been proposed for 70 years. In any case, a shortage of supply is possible, either due to the end of the fields or due to the lack of investments in prospecting and extraction.
