Development of the price of oil
Oil prices rose in the first half of last week amid declining production in the U.S. due to the cold weather plaguing the Gulf of Mexico, but it fell toward the end of the week with the recovery in U.S. oil production. In weekly summary, the price of BRENT oil decreased slightly from about $ 62.85 per barrel at the end of the trading day on 12/2/2021 to about $ 62.11 per barrel at the end of the trading day on 19/2/2021 and the price of a WTI barrel decreased slightly from about $ 59.47 per barrel At the end of trading on 12/2/2021 at about $ 59.24 per barrel at the end of the trading day on 19/2/2021.
Global supply
The expected increase in Russia’s oil output this month has not materialized so far, as output has slowed in a number of oil fields due to the unusually cold weather. In the first half of February, Russia produced about 10.1 million barrels a day, a production of about 44,000 barrels a day lower than in January. Russia’s deputy prime minister said the global oil market balanced after there was an oversupply in the market after the sharp drop in demand during 2020. In his estimation, the low volatility in the market implies that the market is reaching balance and that current prices match the real market situation. Russia estimates that the upper limit on oil prices this year is $ 60, which supports our assessment that the price of oil is not expected to remain above $ 60 over time.
Iraq’s oil exports rose in the first half of February to 3.44 million barrels per day, an increase of about 4.4% over January, even after it pledged to OPEC + to reduce its oil production this month to compensate for non-compliance with production quotas, after January Violation of a similar undertaking. Iraq’s oil marketing company, SOMO, has promised at least two of its customers in Asia that it will supply them in March with the full amount of oil they routinely purchase from it. It also pledged to deliver in February the usual amounts of oil to three of its customers. The increase in output in the first half of the month together with these commitments to its customers to supply the full amount of oil are a warning sign that this month, too, Iraq will not significantly cut its oil production, as it has broken its promises so far.
If Iraq does try to reduce its oil production as compensation to the OPEC + group, then it will have to reduce its oil exports to some of the other customers significantly more than the reduction for each customer that would have been required if it had reduced the amount it exports to all its customers. Iraq’s non-compliance with its commitments to compensate the OPEC + group is expected to increase tensions among its members ahead of a meeting expected in early March where the group will decide on April’s production quotas and this will make it difficult to continue tightening the market over time. Also, if Iraq does not compensate for its non-compliance with production quotas, this may encourage Saudi Arabia to stop reducing production voluntarily, having reduced it by a million barrels a day, which is expected to increase oil supply in the market and lower the price of oil slightly.
Mexico’s oil company, Pemex, has announced that its oil production has risen in the past year for the first time in more than a decade. However, this statement is incorrect and Mexico’s oil production fell by 1% last year and amounted to 1.66 million barrels per day. Pemex’s statement is due to the fact that the company made changes to the production volume reporting procedure and it also began to include condensate gas in its count, which is a gas that becomes a light-like substance after production and removal from the ground and is used to dilute heavy crude oil.
The winter storm in the Gulf of Mexico in the United States slowed the flow of oil extracted from oil wells and in some cases the pumping of oil was stopped completely and led to a significant decrease in US oil production, which is expected to reduce the average daily oil production in February. This severe weather has even led a number of companies with oil pipelines to declare a “force majeure event” so that they will not honor their commitments to oil and natural gas transmission to customers due to the storm that does not allow it.
The US oil inventory decreased in the week ending 12/2/2021, due to an increase in oil exports along with a decrease in its production. Accordingly, the weekly oil report of the EIA (US Energy Agency) indicates a decrease of approx. -7.3 million barrels in commercial inventory in the week ending 12/2/2021, which occurred due to a decrease in net imports of 1,205,000 barrels per day resulting from an increase in exports of 1,245,000 barrels per day alongside an increase in gross imports of only 40,000 barrels per day.
Global demand side
Demand for U.S. fuels rose sharply to over 8 million barrels a day, after being below that threshold for three weeks, and demand for jet fuel fell slightly, but remained around the previous week’s level. Extremely cold U.S. weather has slowed activity Of some of the refineries and in some even to a complete halt to the activity, which is expected to make it difficult for them to return to activity quickly. This damage is particularly significant in Texas, where four of the largest refineries have been significantly damaged and are expected to take several weeks to repair the damage and return to activity, raising the potential for prolonged U.S. fuel shortages. This situation is expected to increase U.S. fuel prices and generate arbitrage And it increases the economic viability of market traders to import fuels from Europe to the US.
Refineries in India are examining the possibility of purchasing oil from Africa and North America, against the background of OPEC + group production quotas which have led to oil producers in the Middle East, which are long-term oil suppliers with India, reducing oil supplies. India is the third largest oil importer in the world and it is estimated that its oil imports will increase by at least 10% this year compared to 2020. In our estimation, this increase in demand is expected to support the price of oil as long as the OPEC + group maintains production quotas.
The natural gas economy
The price of natural gas in the United States (Henry Hub) rose last week, to $ 3.08 per MMBTU, due to the extreme weather that led to a reduction in natural gas production in the Gulf of Mexico, with a focus on Texas, and due to problems with natural gas supply after transmission infrastructure froze. In some areas, this prevented the physical supply of natural gas.
The cold weather in the Gulf of Mexico in the U.S. has led to a number of companies holding pipelines for natural gas transmission declaring a “force majeure event.” Disruptions in U.S. natural gas supply have severely hampered power generation in some U.S.-affected areas as a result of extreme weather. Texas has ordered a ban on gas exports in order to increase power supplies to the state. This ban has led to a significant slowdown in Mexico’s natural gas imports that rely on U.S. natural gas and about 40% of Mexico’s natural gas imports from the U.S. originate in Texas, causing disruptions. Many in electricity supply to about 4.77 million households and businesses in Mexico.
Expect medium-term
Meeting the production quotas of most OPEC + members along with voluntary cuts in Saudi Arabia’s oil production and reduced U.S. oil production due to the extreme weather are expected to temporarily increase the oil market deficit in the first quarter of the year and reduce global oil inventories.
If Saudi Arabia and other OPEC + members continue to comply with the quotas, both formal and voluntary, this will allow a supply level that will support the current price level. In particular, in light of the policy of the new US administration which is expected to oppose the expansion of oil production activities. On the contrary, Iraq will probably not live up to its commitment to compensate for non-compliance with quotas, which may increase tensions between members This year and apparently the market is not pricing this risk.
In the US, oil production has declined over the past week, but in the coming months it is expected to return to a growth trajectory, which is expected to “challenge” the current price level. It seems the market is already very much priced to form a future deficit. Vaccines, which can be easily transported and brought to the developing world at a low price, are an important signal of the potential increase in demand for crude oil in the future, which is already reflected in a very high degree of optimism “in consensus” oil prices. .