RPT-COLUMN-Oil prices have hit the required level for OPEC +: John Kemp

(Retelling Friday’s story without any text changes. John Kemp is a Reuters market analyst. It’s his own opinions.)

* Chart book: tmsnrt.rs/3rOs0rO

LONDON, Feb 12 (Reuters) – Oil prices have reached a critical juncture where OPEC + must decide whether to increase production, or risk losing market share again to U.S. coal shale producers .

Brent futures prices have risen to more than $ 60 per barrel, up from less than $ 40 when the first successful vaccines were announced in November, and less than $ 20 when the outbreak spread prey in April.

After adjusting for inflation, Brent prices are now in the 58th percentile for every month since the early 1990s, which is consistent with a slow but steady rise in output by non – OPEC producers.

In the last decade, every time Brent prices averaged more than $ 57 per barrel, U.S. producers seized all the growth in global oil consumption, raising market share at the expense of OPEC and its allies.

Responding to the previous rise in prices, U.S. producers have increased the number of rigs for oil drilling to nearly 300, up from a low of just 172 in August, according to oilfield services company Baker Hughes.

Newer price increases are likely to ensure that the number of active rigs goes up to the end of June, when the count is likely to exceed 425 or even 450, if the trend continues current on.

Reflecting the rising rig numbers, U.S. output from the 48 lowest states excluding the Gulf of Mexico is expected to rise from current levels with 340,000 barrels per day (bpd) by the end of 2021.

Further output gains of 640,000 bpd are expected by the end of 2022, according to Energy Information Management (“Short-term energy forecast”, EIA, February 9).

If prices rise further, both drilling and production are likely to accelerate even faster in the second half of 2021 and 2022.

BACKGROUND

In the futures market, the price for Brent delivered in April trades more than $ 2.70 per barrel higher than for delivery in November, a price structure called backwardation.

Backdrops usually occur when traders expect consumption production to drop and petrol deposits to fall and fall further (tmsnrt.rs/3rOs0rO).

The current level of support in the futures market is in the 85th percentile for all trading days since the early 1990s, and has been going higher.

This means traders expect a sharp production shortage over the rest of this year, with investments dropped below long-term averages.

If that expectation is right, Brent prices are likely to rise further, perhaps significantly. Rising prices and intense backlash both indicate the need for more production in the rest of the year.

If OPEC and its OPEC + counterparts do not provide the extra output to address the shortage, it will come from U.S. coal shale producers and other non-OPEC sources, spurred by rising prices to boost production. .

AM FEAR OPEC +

Between 2011 and the first half of 2014, and then again between 2017 and 2019, OPEC and then OPEC + failed to increase output sufficiently to alleviate the expected shortage and to increase pressure. has raised prices.

In all cases, prices rose, the market moved to a large and stable backlog and, with a delay of 12-18 months, U.S. coal production was higher.

Both times, OPEC claimed that the market was not tight and that there was no need to increase production – until it was too late and the rise in coal production had pushed the market on. back already.

OPEC members picked up the wind from higher prices and revenues, even as their markets eroded and produced coalstone, creating conditions for a recent downturn.

OPEC’s delay in alleviating the shortage contributed to an explosive rise in prices, reduced cyclical instability, and made the next cyclical decline inevitable.

In March and April this year, OPEC + will again have the same question whether to increase production to prevent a steady rise in prices.

Due to the delay between deciding to build a product and having additional barrels available to consumers, OPEC + has to make a decision in the next six weeks to affect supply. at the end of the second quarter and the beginning of the third, when the market arrives it is expected to become very tight.

The question is whether OPEC + will offset an increase in output, as it did in 2013/14 and again in 2017/18, or move proactively to ease the pressure on supply and to reduce the cycle of rising prices.

Related Columns:

– Need for rising oil prices highlights need for more production (Reuters, Feb. 4)

– Oil market on track to rebalance around mid-2021 (Reuters, Jan. 29)

– Oil prices expect tight market by mid-2021 (Reuters, November 19)

– Oil producers fight for market share as consumption growth slows (Reuters, July 6) (Edited by Jan Harvey)

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