analysisOil was last as expensive as it is six years ago. With demand rising, oil producers are arguing over who can supply more oil, but nothing happens. For the time being, a drop in prices does not appear to be an issue.
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Motorists have noticed it for a long time. The petrol price recently reached a new record. The reason is simple: demand is picking up as the global economy recovers from the corona pandemic, but the supply of oil is lagging. Just last week, negotiations between OPEC members and Russia, the so-called OPEC+, for a higher production ceiling failed.
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The United Arab Emirates, together with Kazakhstan and Iraq, wanted a different distribution key for oil production. They feel they are entitled to a greater production than the current rules allow them. Saudi Arabia, in particular, did not like that. The talks broke down without an agreement, which meant that the increase in oil production that had been hoped also fell through.
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When the corona pandemic hit worldwide last year and demand for oil collapsed, OPEC+ decided to pump six million barrels less per day. The row last week was about reversing part of that production cut.
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Inflation
There will be no additional barrels of oil for the time being, while demand is picking up. This causes prices to rise, much to the dismay of oil-importing countries such as India, China and the US. They have already called for extra production, because the high oil prices are one of the causes of the rising inflation. And inflation can just be a bummer in the economic recovery.
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It is remarkable that the US is joining the complainants. The country also produces plenty of oil itself. Certainly since the production of shale oil, the US has been one of the largest oil producers in the world.
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And shale oil production can expand very quickly if oil prices rise. In recent years, attempts by OPEC to raise the oil price with production restrictions have been thwarted by shale oil producers who increased their production when prices rose.
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Stricter environmental requirements
There are several reasons why shale oil producers are not jumping into the gap now. Last year, the sector struggled with very low oil prices, even briefly with negative prices. To be on the safe side, a large group of producers agreed to sell the oil this year for $55 a barrel. Now that the price in the market is $75, they can’t take advantage of that. Producing extra does not get them anything extra.
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In addition, their costs have increased as they have to meet much stricter environmental requirements under President Joe Biden than under President Donald Trump. And they have less easy access to financing.
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“Total shale oil production is now at 11 million barrels per day,” said Hans van Cleef, energy expert at ABN Amro. “Before the crisis, that was 13 million barrels per day.” This means that, in combination with the production cut of OPEC+, a total of 8 million barrels of oil per day less is produced than before the corona pandemic.
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Nevertheless, Van Cleef expects that the oil price will fall to 60 to 65 dollars per barrel this year. Negotiations in the OPEC+ have not yet finally failed. The agreement expires in August. So they still have some time to make new agreements,” says Van Cleef. In addition, demand for oil is likely to decline as the contagious Delta variant of the coronavirus spreads at lightning speed. This creates new restrictions in many places and that leads to less growth. And less growth means less demand for oil.
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