Energy crisis, OPEC+ discipline push prices near highs
In mid-October, Brent reached three-year highs despite worrying import data from China, with traders choosing to focus on increasing oil demand elsewhere.
On Oct. 15, Brent prices exceeded 2018 levels, fluctuating around the $85 a barrel mark, and West Texas Intermediate reached $82.3 — its highest level in seven years. Many analysts believe that prices will continue to rise.
The rally in oil prices was supported by the rapid rise in energy commodities, the switch from gas to oil amid record-high natural gas prices, and the tight control over supply from the OPEC+ group. In addition, demand is growing steadily due to the economic recovery from the effects of the COVID-19, as the increasing rate of vaccination encourages abolition of lockdowns and the lifting of restrictions, which further stimulates consumption.
OPEC+ also gave a push to the oil rally last week after Saudi Energy Minister Prince Abdulaziz bin Salman reiterated his commitment to a gradual and phased increase in production and ruling out the option of adding more supply than planned. Speaking at Russian Energy Week in Moscow, he assured the market that “by end of this year, we will be at balanced stocks,” adding “the long game is what the market should be eyeing.”
The International Energy Agency in an October report raised its forecast for global oil demand, which was an additional bullish factor for the oil market. The agency said the switch to oil products from natural gas due to the energy crisis could raise global oil demand by 500,000 barrels per day compared with “normal conditions” — a market in which energy and power prices are not setting record highs. So, in 2021 and 2022, global consumption of oil may increase by 5.5 and 3.3 million bpd, respectively, instead of the previously expected 5.2 and 3.2 million bpd. Accordingly, the global oil deficit will continue at least until the end of 2021 and starting from Q1 2022 the market will gradually move to a balance and then into surplus.
In general, the market is optimistic about oil prices, as it expects demand to grow in the run-up to winter.
Dr. Namat Abu Al-Soof
However, by midweek oil prices had decreased as traders realized that they had been buying oil too actively and decided to fix profits. The oil market rally also paused against the deterioration of the IMF economic growth rate forecast for the leading economies due to the disruption of supply chains. Among the risks to the oil market, the IMF highlighted the possible worsening of the pandemic in the world due to the spread of the delta strain. In addition, an increase in production from Iran, Libya and Venezuela, as well as an increase in shale oil production in the United States, could put pressure on oil prices.
However, no one was ready to refuse to buy, so the fall in prices was only symbolic and short lived.
In general, the market is optimistic about oil prices, as it expects demand to grow in the run-up to winter. At the same time, market participants will closely monitor the effect of switching consumers to petroleum products due to rising gas prices and OPEC+ production policy.
Meanwhile, the complicated state of the oil market has revived speculation about how much oil prices will rise and whether prices will reach $100 a barrel, especially if this winter in the northern hemisphere is colder than usual. The situation is likely to persist until the end of the year, but there are no fundamental reasons for prices to remain so high in the long term, as high energy prices could lead to a slowdown in the global economic recovery, lower oil demand and, as a result, a correction in prices.
• Dr. Namat Al-Soof is an Iraqi oil expert with long experience in upstream and market analysis. He held senior analyst positions at OPEC, IEF in Riyadh, and OPEC FUND for International Development. Currently, he is a consultant to a number of companies in the oil industry.