Development of the price of oil
The price of BRENT oil continued to rise from about $ 64.43 a barrel at the end of the trading day on 26/2/2021 to about $ 69.39 a barrel at the end of the trading day on 5/3/2021 and the price of a WTI barrel rose from about $ 61.50 a barrel at the end of trading in 26/2/2021 to approximately $ 66.09 per barrel at the end of the trading day on 5/3/2021. This increase was due to the OPEC +’s surprising decision to maintain current production quotas, along with only individual concessions, and to Saudi Arabia’s decision to continue the voluntary cut in its oil production in April as well.
Global supply
Continuing with the above, the OPEC + group surprised the market when it decided to maintain current austerity quotas even in April, despite the rise in oil prices, and it hints that it intends to maintain a tight market over the near term. Russia and Kazakhstan have been exempted from these stringent quotas and have received individual reliefs that allow them to increase their oil production by 130,000 and 20,000 barrels per day, respectively. This decision to maintain the strict production quotas was supported by Saudi Arabia which urged the rest of the group to support the strict production quotas as well. This is in contrast to the concessions agreed in the original agreement and despite Russia’s support for increasing production quotas.
The implication of this decision is that the OPEC + group leaves the reduction of oil production at the level of about 7 million barrels per day, about 7% of pre-crisis global oil consumption, despite the recovery in demand for oil. In this situation, it is OPEC’s entry into a state of considerable overcapacity. In addition, Saudi Arabia has announced that its voluntary reduction of production, of one million barrels of oil, will continue in April as well. OPEC + is expected to meet again on April 1 to decide on the group’s steps and their response to developments in the market in May. Oil producers in Canada are also expected to contribute to tightening oil supply in the near future and their oil output is expected to shrink by about 500,000 barrels per day due to maintenance works by oil producers.
India, which is hurt by relatively high oil prices, said it supports expanding OPEC +’s oil production, rather than continuing the drastic cuts in production quotas. This is because the cuts in production have led to a significant increase in the price of oil and even support it not falling. Note that India is the third largest oil importer in the world so it has a lot of interest in lower oil prices.
Russia’s oil production in February was lower than its production quotas under OPEC +, for the first time since May 2020 when aggressive production quotas began, and Russia produced about 38.56 million tonnes of oil and condensate gas equivalent to about 10.095 million barrels per day. In Venezuela, oil exports fell 13% in February compared to January exports to 41,1857 barrels a day. This is due to the US sanctions on the country’s exports of goods which are a major source of funding for the administration of President Nicholas Maduro.
U.S. oil inventories rose sharply in the week ending 2/26/2021, due to the significant and unusual decline in U.S. refinery activity as a result of the extreme cold that prevailed in the Gulf of Mexico in the U.S. and led to a freeze on transmission infrastructure. Accordingly, the EIA (US Energy Agency) Weekly Oil Report indicates an increase of approximately 21.6 million barrels in commercial inventory in the week ending 2/26/2021, which occurred This is also due to a large increase in net imports. This abnormal increase in inventory is the largest since the EIA began collecting this data in 1982. In addition, according to the EIA, US oil production fell on an annual level in 2020, for the first time in four years. -8% to 11,313 million barrels per day. This level is the lowest since 2018 and the annual decline is the sharpest since 1949.
U.S. refinery activity continues to recover after extreme weather closed 16 Texas refineries, three Oklahoma refineries and two Louisiana refineries. At the same time, U.S. refineries that did not close increased operations to take advantage of high refining margins. Which have recently risen due to rising petrol prices in some U.S. states that have relied on fuel from refineries damaged by the extreme weather, and to process more crude oil to produce fuels.
A seaport in Louisiana that exports oil to ships used as large oil tankers will not export oil during February, as customers in Asia halted purchases due to rising inventories in China, making it difficult for customers to find storage spaces for oil. This is in stark contrast to January, when the port will export about 15 million barrels of domestic oil to buyers in Asia, with an emphasis on customers from China, South Korea and India.
Global demand side
Demand for vehicle fuel in the U.S. rose the previous week by about 941,000 barrels a day and returned to a level higher than 8 million barrels a day, due to drivers returning to the roads with the extreme weather in the Gulf of Mexico and the central U.S. leading to a sharp drop in demand the week before. Demand for jet fuel has also risen back to the high level of the past year, but is still lower than the high level of that period recorded in January.
U.S. fuel inventory dropped 13.6 million barrels after the extreme cold that hit the Gulf of Mexico in mid-February and is the sharpest weekly decline since 1990. This drop in U.S. inventory could raise fuel prices to a record high of the last six years of more From $ 3 per gallon.
Demand for petroleum distillates in Asia continues to strengthen and according to India’s Ministry of Energy, India’s oil consumption is expected to increase in the coming years and India expects that by March 2022 the consumption of petroleum distillates in the country will increase by about 10% from current level. In China, demand for fuel continues to grow, despite concerns about the spread of the virus in the country and the government’s recommendations for people to stay at home during Chinese New Year. China’s fuel and diesel consumption strengthened and reached a higher level than it was before the outbreak of the corona virus due to the faster-than-expected return of industrial activity alongside the expansion of infrastructure construction in honor of Chinese New Year. In addition, people preferred to travel in their private car over public transportation due to the fear of rising morbidity, which also increased the demand for oil in China.
Rising morbidity in Brazil and Mexico cools demand for fuel and diesel. These markets are very important to U.S. refineries since a significant portion of U.S. refineries’ oil distillate exports are destined for them. In Mexico, fuel consumption fell in January to an eight-month low and in Brazil demand weakened, after fuel sales reached pre-crisis high levels, and have now dropped to their lowest level since May 2020.
The natural gas economy
The price of natural gas in the US (Henry Hub) continued to fall slightly last week, after the larger drop the previous week, reaching $ 2.75 per MMBTU. This drop occurred as a continuation of the drop the previous week due to the warming weather that led to market supply. After the extreme weather in mid-February led to a decline in supply along with rising demand.
China’s natural gas imports, which include natural gas and gas imported through pipelines, rose 17.4% in January-February compared to the same period in 2020 and China imported 28.68 BCM of natural gas in those two months. This strong increase is mainly due to an increase in domestic consumption of natural gas due to the harsh winter that was in China, which increased the demand for heating homes and employment spaces.
Expect medium-term
Continued maintenance of OPEC +’s stringent production quotas, along with continued voluntary cuts in Saudi Arabia’s million oil production per million barrels per day are expected to support high oil prices in the near term and also support a further reduction in global oil inventories. Oil prices are expected to be sensitive in the near future to the degree of compliance of OPEC + members with production quotas, in which there may be deviations as high oil prices increase the viability of deviations of some of the group members with an emphasis on Iraq.
There is also importance to the volume of oil production in the US, as current oil prices increase the viability of increasing oil production through oil shale. However, an increase in US oil production is not expected in the coming weeks and if there is such an increase it will be felt only later. This year. Also, an increase in U.S. oil production is likely to face difficulties on the part of the U.S. government that supports environmental protection. In these circumstances, changes in oil production are expected to be more relevant in the medium term and to a lesser extent in the near term.
It seems that the current price increase is priced to a considerable extent, including the expected deficit in the oil market and the expected increase in demand during the second quarter of the year. Advances towards diversified and growing global marketing of 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 seems to be embodied today in a high “consensus” of oil prices. Accordingly, futures contracts that are currently characterized by short-term optimism anticipate some decline in the price of oil in the medium and long term.