Will producers be tempted by a rise in crude oil prices to disregard quotas and voluntary production cuts?
Oil markets have taken some respite. But is this rally sustainable?
Prices were surging until reports that Russia might back off on oil production cuts spooked the market.
But even with that uncertainty, we’ve seen a complete turnaround in the markets.
Just a month ago, crude oil markets faced a bloodbath.
Since then, demand has gone up and supply has tightened.
A number of factors have contributed. Countries are opening up economically after the worst of the COVID-19 lockdown. People have begun commuting again, though mostly just to their workplaces. Many continue to avoid public transport and are using cars, to minimize contact with others.
The fear factor is still holding on. And that means oil demand won’t go back to pre-pandemic levels any time soon.
The current increase in oil consumption isn’t a demand buildup. It’s a catch-up on the lost demand – and only to an extent – while a ‘new normal’ is being carved out.
In the meantime, global crude supplies have gone down – and by a margin. Members of the Organization of Petroleum Exporting Countries (OPEC) continue to tighten taps.
Thanks to extreme political pressure exerted from elsewhere on Saudi Arabia, that country is shouldering the lion’s share of the cuts.
And now it’s been announced that output from the Saudi-Kuwait neutral zone won’t begin before June 1. That would take somewhere from 300,000 to 500,000 barrels per day (bpd) from global output.
Involuntary output cuts from the world’s largest producer, the United States, is also contributing significantly to the balancing act. In fact, American oil production is dwindling much faster and deeper than analysts initially thought.
The U.S. Energy Information Administration’s estimate of weekly U.S. field production of crude oil and condensate, for the week ending May 15, shows production of 11.5 million bpd. That’s a reduction of 1.6 million bpd since the estimated peak production of 13.1 million bpd reported for the week ending March 13.
According to Oilprice.com, the U.S. and Canada appear to have lost somewhere between 3.5 and 4.5 million bpd of crude oil and condensate from oil production shut-ins. In North Dakota, more than 7,000 wells have been closed, shutting down 950,000 bpd of oil and condensate production.
But this story also has a flip side. There are murmurs that increasing prices could reignite the shale oil revolution. Restarting shut-in production or completing wells the moment prices rise high enough could spoil the party, says Forbes.
Will U.S. shale drilling activity resume sooner than the market needs, asks Tsvetana Paraskova while writing for Oilprice.com.
And will other producers be tempted by a rise in crude oil prices to disregard quotas within OPEC-plus?
Some could, analysts say.
There’s also speculation that once markets stabilize, the price war between crude oil giants Russia and Saudi Arabia may restart.
“Once the price returns to $50 to $55 (a barrel), I would not exclude that the struggle for markets will reignite,” Tass quoted Alexander Gryaznov, director of S&P Global Ratings in Russia, as saying.
The oil markets have taken a sigh of relief, but is the current stability sustainable and for how long?
Economic fundamentals are still not strong enough to support the markets. As Ellen R. Wald says, sentiments, hope and headlines are driving oil market exuberance.
Toronto-based Rashid Husain Syed is a respected energy and political analyst. The Middle East is his area of focus. As well as writing for major local and global newspapers, Rashid is also a regular speaker at major international conferences. He has been asked to provide his perspective on global energy issues by both the Department of Energy in Washington and the International Energy Agency in Paris.