Oil is on the verge of closing its seventh consecutive week of gains. A barrel of Brent, the global benchmark oil, has exceeded $ 85, the highest levels in more than three years. Demand is outpacing supply , a trend that will continue into the remainder of 2021, draining excess inventories that had accumulated during the COVID crisis. Now, oil is entering a “supply anxiety phase,” according to Natixis experts.
All firms and institutions are raising their forecasts for the price of crude. Brent is trading above US $ 85 this day , while West Texas, the benchmark index in the US, is above US $ 83 per barrel.
Crude oil is at ‘historically’ high levels since fracking and shale oil ( shale oil ) made their appearance on the market in a broad way (back in 2014), completely changing the framework of this market that had been dominated by the OPEC cartel for years. Then, the US and Canadian oil industry began to eat up a good part of OPEC’s market share , lowering the price of crude to the marginal cost of producing each barrel with the hydraulic fracturing technique.
OPEC regains power
Now, the cartel is regaining part of its power in the face of the uncertainty that the oil industry has to endure in developed countries, where the generation of energy through renewable sources has become a high priority. This leaves crude oil back in the hands of OPEC and Russia , to summarize it in some way.
In recent months, “the main driver of crude prices has been the rebound of the entire global energy complex, particularly natural gas, which is driving a shift from gas to oil in the industrial and energy sectors, which could generate a new impulse for the growth of oil consumption during the fourth quarter “, they assure from Natixis.
The International Energy Agency explained in its last report that “the acute shortage of supplies of natural gas, LNG (liquefied natural gas) and coal has caused a vertiginous increase in the prices of energy supplies, which is causing a change massive towards petroleum products and the direct use of crude oil for power generation. ” The problem is that the burning of crude oil and derivatives is extremely polluting, which should limit this practice in advanced countries.
This trend could increase oil demand by an additional 500,000 barrels per day between September and the first quarter of 2022. The result of this unexpected demand is already being seen in the prices of crude oil futures.
Oil exceeds $ 85 per barrel
“Although the magnitude of the change is uncertain, the increase in natural gas prices has had broader implications, raising the idea that the oil market will have a supply crisis of its own in the next year, a phase of ‘ supply anxiety ‘”, they assure from Natixis.
Broadly speaking, 2021 can be considered a year of normalization for oil demand, while supply could get stuck in part of the world: “There are significant doubts regarding the ability to normalize on the supply side until 2022”, according to the experts of the French investment bank.
UBS analysts warned in a report this week about the risks posed by the arrival of winter , which can accelerate the demand for oil (its derivatives) to generate electricity in the industry and start the heating of part of the northern hemisphere.
On the OPEC + side it is very likely that the group will have collective difficulties in returning to the market the 5.8 million barrels per day of production cuts. It’s already clear that the October 18 baseline used to calculate the group’s dues is overstated for some members.
From Natixis they hope that only five producers (Saudi Arabia, Iraq, United Arab Emirates, Kuwait and Azerbaijan) can fully use their proportional part of the increase in the quota of 5.8 million barrels per day. But the end result remains to be seen. Without investment in the US and Canada, along with OPEC reluctant to pump more crude, the supply crisis and market anxiety will be served. This same week, oil inventories fell by 2.3 million barrels in the US and distillates by 3 million barrels.
Fall in inventories
From Bank of America Merrill Lynch (BofAML) they assured a few weeks ago that their forecast on oil entailed serious and “growing risks to the upside.” Everything will depend on the climate and the reaction of the supply, that is, of the large oil producers. A cold winter with low gas inventory levels can cause a massive switch to oil for energy, which in turn will have a significant impact on the prices of crude itself.
Commercial oil inventories are below the five-year moving average
“In line with this vision, we project deficits in the coming months that should support oil prices until the end of the year. However, a new wave of covid-19, a tantrum in the markets, a debt crisis in China or the return of the barrels of Iranian crude could cause that the oil falls “, explain these experts of BofaML.
The UBS note highlighted that OECD inventories had fallen to 2,824 million barrels, according to the latest published data. This leaves the level of reserves in developed countries some 162 million barrels below the moving average of the five years prior to the covid. Below-average inventories are often another factor pushing up the price of ‘black gold’. Crude reserves act as a safety net when the market is unable to generate all the oil that is demanded.
“In addition, weather is fast becoming the most important driver of energy markets. If the winter turns out to be much colder than normal, global oil demand could increase by 1 to 2 million more barrels per day. Low In this scenario, the oil market deficit this winter could easily exceed 2 million barrels per day and reach our goal of $ 100 a barrel, “BofAML analysts say.