The oil market got a bit of a shock this week when OPEC and friends decided against adding more production in this high priced environment.
Many analysts had expected that Saudi Arabia would release the extra million barrels it removed at the beginning of the year, but the decision at this springtime ministerial gathering of OPEC+ was to maintain current production level.
In Friday trading, Brent crude was priced above US$68 with West Texas Intermediate (WTI) holding above US$65 a barrel.
The rollover tactic is nothing new in OPEC’s arsenal of decision making, as they urged caution at a time of uncertainty.
The Saudi Arabia energy minister Prince Abdulaziz bin Salman said the group would meet monthly to review the situation and in the live virtual press conference, he said that Saudi Arabia would “gradually phase in our one million,” adding they were in no hurry to add additional oil to the market.
“We’re not fast, we’re not furious; we’re cautious.” He said “there’s no science about it” but that the gradual release of production was the best course, given the unpredictability of the market.
Global oil inventories remain high, above the five-year average. Prince Abdulaziz said he was not a fan of backwardation and he said that when inventories are back at 2015-2019 levels, that will be “comforting”.
Despite signs of economic growth in many countries that should bring stronger oil demand, he said the organisation needed “to wait for these things to become reality, we just have to be cautious”.
Russia and Kazakhstan have been granted permission to add more oil to the market to meet their domestic seasonal demand and refining needs.
Reviewing price targets
Many of the investment banks were quick to review their price targets for Brent with Citi and ANZ at US$70 and UBS and Goldman Sachs expecting prices to hit US$75 a barrel in the second half of the year.
Higher prices could attract more US shale players to the market, but Prince Abdulaziz believes they have learned lessons from the past and he expects they will be more disciplined, saying “drill baby drill is gone forever”.
In recent months, the mood in the US appears to be more focused on returns to shareholders rather than on growth of production and the Biden administration will also encourage focus on investment in renewables as the Democrats deliver their energy policy for the future.
The CEO of CMarkits, Yousef Alshammari says, “US oil production is not expected to rebound to 2019 levels which will leave OPEC+ with much more influence on the markets in 2021.”
Energy leaders from around the world met virtually for the annual CERAWeek gathering with a stronger focus on climate change and the role of renewable energy in the future.
The CEO of BP, Bernard Looney called it a “brutal year” and the CEO of Saudi Aramco, Amin Nasser said it was the “biggest crisis in a century”.
Vital part of the mix
There was general agreement that hydrocarbons will remain a vital part of the energy mix, but lack of investment could mean tightness in the market.
The CEO of Hess Corporation, John Hess said he sees an increase in demand for oil in the coming years but added that the industry is “not investing enough to grow oil and gas in the future”.
Commenting on the role of shale oil, he said he believed shale producers had found “a new financial discipline” and the US market had transformed from a “growth business to a harvest business”.
The global economy is showing signs of improvement as the vaccination programme is delivered in more countries.
The economy will no-doubt gain strength in a post-Covid world, with the return of travel and the demand for jet fuel.
While we heard from so many executives and ministers this week, the focus was definitely on a more optimistic future, but the general mood was certainly one of caution.