London:- THE big question for the oil market is whether member nations of the Organization of the Petroleum Exporting Countries (Opec) remain disciplined and keep to the cartel’s supply management accord.
OPEC has agreed to raise output by tranches of around 400,000 barrels a day in each of the coming months. Member nations are banking on an improvement in global demand. The increase in production should peak at two million barrels a day in 2022. The question is whether all the members will stick to the accord. Future Russian policy is a crucial uknown. The huge producer, is not a member of OPEC, but it has also agreed to follow Saudi Arabia, the key OPEC driver.
A sign of potential cracks in the OPEC cartel is the stance of the United Arab Emirates (UAE). The nation initially refused to back OPEC’s plan to raise output. The UAE wanted a higher proportion of the production accord and eventually Saudi Arabia backed down.
Oil bears believe that Russia and some of the 13 Opec member nations such as Libya and Nigeria are desperate for cash. They could leak oil over and above what was agreed under the OPEC accord.
Iran’s Oil Minister Bijan Zanganeh also said that, regardless of any Opec accord, Iran, a 2.4 million barrels per day (bpd) producer, would return to the markets swiftly. That of course depends on whether US sanctions are lifted.
OPEC managed to change the course of oil prices in 2020/21 with tight discipline
According to latest Opec data, Opec produced only 23 million bpd in May this year compared with 27 million bpd in the same month in 2019.
Due to Opec’s output cut, Brent crude oil prices have soared from a low of $18.70 a barrel in April last year to a peak of just under $76 a barrel.
In April last year, problems on the derivatives market caused West Texas Intermediate (WTI), the US crude, to plunge to negative levels. Since then the price has soared to a peak of $74 a barrel. Prices, however, have already begun to fall from those heights.
The highest Brent level in the past five years was $86 in September 2018 and Brent oil’s all-time peak was $147 in July 2008, only a few months before the financial crisis.
Indications from various oil trade magazines, investment banks and social media, are that the majority of traders are bullish. Some forecasters betting that the price to hit US$100 later this year. This optimism is in contrast to the general pessimism that prevailed in the second quarter of 2020.
EIA believes that fundamentals will cause a decline in oil prices
The US Energy Information Administration (EIA), however, believes that the level of demand is uncertain because of the global impact of Covid-19 variants.
It takes the view that OPEC and other producers’ increase in output will match oil consumption.
EIA predicts that Brent prices will average $68 per barrel in the third quarter of 2021.
But in 2022 “continuing growth in production from Opec and accelerating growth in supplies from the US and other non-Opec producers will outpace global oil consumption”.
These forecasts take into account a potential 5.4 million rise in global consumption to an average 97.7 million bpd in 2021.
The result, according to the EIA prediction, will be declining oil prices with Brent averaging $60 per barrel in 2022.
Frackers will take advantage of higher prices
According to EIA’s recent data, US crude oil production averaged 11.2 million bpd in March 2021, an increase of 1.4 million bpd from February. Since prices of WTI are expected to remain above $60 a barrel during 2021, the EIA expects frackers to drill and complete more wells. US oil output is thus expected to rise to an average of 11.8 million bpd in 2022.
© Neil Behrmann. This article was first published in The Business Times Singapore . For other Asian and global articles try https://subscribe.sph.com.sg/publications-bt/