After crossing the $ 70 a barrel mark at the start of the year due to escalating tensions between Washington and Tehran, raising fears of a lasting surge in prices, oil prices have stagnated in recent days at $ 65 a barrel. In short, the scenario of a possible oil shock, that is to say a rapid increase in black gold prices over a very short period – is moving away and we are moving towards a stabilization of prices. For the moment.
Geopolitical risks
Certainly, the blocking of the main oil terminals in the east of Libyan territory slightly pushed the markets up on Monday, January 20. The barrel of Brent from the North Sea for delivery in March, European reference gained 0.26% to 65.03 dollars at the end of the afternoon.
But the fear of a conflagration in the Middle East seems to have already subsided. “After the drone attack that killed Iranian General Soleimani in early January, the markets seem to have integrated the fact that for the moment tensions have eased between the United States and Iran,” observes Francis Perrin, researcher at the ‘Institute for International and Strategic Relations (IRIS), interviewed by Boursorama.
However, questions remain, insists the researcher “if a war does break out between the two countries, the impact on prices will be extremely significant”. In addition, the scenario of new attacks on American companies’ installations in the Middle East cannot be excluded. But for the time being, the markets are reacting rationally to geopolitical tensions because they have had no impact on production. In short, prices stabilize around their current levels.
If the eyes turn mainly on the upheavals in the Middle East, the prices have also been largely influenced in recent months by the tense reports between Beijing and Washington and on the prospects for growth at the global level. “The trade war between China and the United States has raised questions and raised fears of a slowdown in global demand and consumption”, reminds Boursorama Benjamin Louvet, raw materials manager at OFI Asset Management.
Secondly, we must take into account a more cyclical impact on prices. “We are entering the winter season and it is during this period that we tend to notice a drop in demand, the peak of consumption is indeed rather during the summer, especially in Middle Eastern countries that use air conditioning. All of this contributes to an imbalance between supply and demand, ”continues the manager.
American shale oil out of breath?
In recent years, the American shale oil offensive has considerably destabilized the market. To the point of forcing the Organization of the Petroleum Exporting Countries (OPEC), and mainly its leader, Saudi Arabia its leader to review its copy. As a reminder, for three years now, the cartel has supervised its oil production in order to rebalance the market in the face of the boom in American shale oil and to support prices. At their last meeting on December 6, OPEC and its allies agreed on a further drop in production of 500,000 barrels per day (from -1.2 to -1.7 million barrels, mbd) for the first 2020 quarter, before deciding on the follow-up to their March 6 meeting.
However, after flooding the market, shale oil companies are in a way facing the weariness of investors and are also forced to revise their ambitions downwards. “Overall, shale oil production would be 15% lower than expected, due to the difficulties encountered. Now, shale oil companies are forced to reduce their pace: they now lack funding and have been unable to generate free cash flows, ”notes Benjamin Louvet. “The firm IHS Markit has also lowered its growth figures. It no longer evokes more than 400,000 barrels per day of growth in shale oil production in the United States for 2020 and 0 in 2021. As a reminder, tankers must constantly drill new wells to maintain their extraction because the production of ‘an unconventional oil well is declining very quickly. Bef, without investments, the level of return will necessarily have to be lowered.
In addition, the unconventional petroleum industry will have to take into account the environmental problem that is increasingly present among investors, insists Benjamin Louvet. “Indeed, the excessive flaring of shale gas (a large part of the gas extracted at the same time as the oil is burned), a source of massive release of greenhouse gases, will become a real problem”. Oil tankers will have to take into account the incentive to invest in clean sectors, and therefore necessarily invest less in oil.
Investments in upstream oil versus global growth
In this context, and despite the declarations of the big powers to reduce their use of fossil fuels, the demand for oil continues to grow. The organization of oil-exporting countries has revised its estimates upwards and now thinks that demand growth will reach 1.22 million barrels per day (mbd) this year compared to 2019, a revision in 0.14 mbd increase.
In its annual report on market prospects by 2040, the International Energy Agency (IEA) for its part on an increase in demand of about one million barrels per day (bpd) on average each year until 2025, compared to 97 million bpd in 2018.
But has this increase in demand sufficiently anticipated by conventional oil players? In February 2018, Patrick Pouyanné, CEO of Total explained that “the major investments in the” oil & gas “industry have not yet resumed. We are around 400 billion dollars in exploration-production, against more than 750 billion at the peak of 2014. After 2020, we risk running out of oil. ”*
Since then, investments in upstream oil have gone up again (the big oil companies to invest nearly 5,000 billion dollars in exploration) but “they require time”, tempers Benjamin Louvet. And in a context of declining investment in shale oil, it could be difficult to meet future global demand. Which could cause tension on prices …
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