Oil market madness


Here is a chart of the price of oil.

Over the past two years, oil has traded as low as $19 a barrel (or below zero if you were buying an American blend called West Texas Intermediate) and up to $139 a barrel.

We haven’t seen such dramatic swings in the price of oil since the 2008 financial crisis, when oil fell from $150 a barrel to below $40 as fears of a global recession led to the collapse demand.

This time around, the oil price volatility was caused by several factors: the Covid-19 pandemic; the energy transition; underinvestment in new projects; politics within OPEC, the cartel of the 13 major oil-producing nations; and especially by the unpredictability of Russia.

The result was misery for motorists, a sharp rise in inflation and a blame game in the United States ahead of the midterm elections in November.

FT Edit distilled the best of the FT’s oil price coverage to explain what’s driving the market and why volatility is likely to continue.

A price war during the pandemic

As the world began to lock down in the face of the Covid-19 pandemic in early 2020, halting travel and closing factories, an obvious response would have been for oil producers to cut production.

Instead, Russia decided to keep pumping in order to drive prices down to the point where US shale oil producers, with their higher costs, would lose money on every barrel.

[Russia] had bristled as shale production soared thanks to its price-friendly cuts with OPEC. Washington’s decision last month to sanction the trading arm of Rosneft, Russia’s state-controlled oil champion, has only deepened Moscow’s animosity against the US oil sector.

In the background, Igor Sechin, boss of Rosneft and close confidant of President Vladimir Putin. He has long been opposed to cuts with OPEC and personally offended by the new sanctions. The coronavirus crisis has provided an opportunity for strike action. “This action did not concern the oil market. It was about ego and revenge,” said an OPEC delegate.

Extract of Eight days that shook the oil market — and the worldMarch 13, 2020

In turn, Saudi Arabia decided to fight against Russia for market share and decided to flood the market with oil, increasing production to a record 12 million barrels per day and reducing prices up to $8 a barrel.

The timing couldn’t have been worse. When Saudi Arabia turned on the taps, demand plummeted as more countries locked down around the world.

Eventually, the Trump administration was able to convince the Saudis to cut production and allow prices to stabilize. OPEC agreed to start cutting 9.7 million barrels per day of production in May, just under a third of its daily output.

But before the cuts took effect, the world’s storage tanks had already filled up and major hubs such as Cushing, Oklahoma, had nowhere to put more oil. In late April, the world saw the price of oil in the United States turn negative for the first time, as traders began paying people to get rid of oil.

Front page of the Financial Times from April 21, 2020 showing that US oil has turned negative

The complications of the energy transition

But geopolitics wasn’t the only thing causing swings in the oil market. The ructions of the pandemic have accelerated calls for oil companies to accelerate the energy transition, as falling oil prices forced the US shale sector to write down $ 300 billion and already skeptical investors sold shares of Big Oil .

Chart showing oil producers suffered heavy losses

After writing off billions of the value of its global oil assets in June, BP said it would review its exploration plans and said the cuts would “allow us to be better competitive during the energy transition”. Shell also pledged to “adapt to ensure the business remains resilient”.

As the oil majors begin to stop investing in new exploration and production, the world is becoming increasingly dependent on state oil companies.

Can national oil companies pump enough?

As lockdowns were lifted towards the end of 2020 and demand for oil rose, Opec+, a group that includes the original 13 members of OPEC and 10 other countries including Russia, only increased. production only slightly, arguing that the virus could cause further economic disruption.

“The recovery has not been uniform around the world,” said officials from an OPEC+ ministerial committee monitoring the landmark deal on supply cuts. They recommended that the broader group of countries, including Russia, take “other necessary measures” if needed. [ . . . ]

Amrita Sen of consultancy Energy Aspects said Saudi Arabia and its partners inside and outside OPEC were “hoping for the best, but preparing for the worst”.

“Asian demand – a key destination for oil from the Middle East – is picking up globally, but consumption in the west is going the other way. It’s so hard to predict anything,” he said. she stated.

Extract of OPEC keeps secret its strategy in the face of the fall in oilSeptember 22, 2020

But the group has also been constrained by the aging infrastructure of some of its members, such as Nigeria and Angola, which have not even met their share of the relatively modest production target.

Russia starts a war

Prices soared again when Vladimir Putin invaded Ukraine in February 2022. European countries were initially reluctant to impose energy sanctions due to their dependence on Russian gas, but in May the EU agreed to d ban Russian oil transported by sea by the end of 2022.

The bloc also took the opportunity to stress the need for a transition to other energy suppliers and greener alternatives, pledging to spend 195 billion euros.

On Wednesday, the European Commission will unveil a €195 billion plan to deliver remedies, emphasizing the need for more renewable energy, lower consumption and reliable alternative suppliers. But the plan will also mark an attempt by Brussels to bring together EU energy infrastructure more cohesively, removing bottlenecks and ending delays to projects such as the Midcat pipeline.

“If we had made these interconnections when they were agreed [with France in 2014 and subsequently]Europe today would not be in this situation of dependence [on Russia]Portuguese Prime Minister António Costa said when meeting with his Italian, Spanish and Greek counterparts in Rome in March.

Extract of Europe’s efforts to fill its energy gapsMay 16, 2022

An unstable future

The scale of the energy transition and geopolitical uncertainty could weigh on the oil market for a long time to come.

ExxonMobil chief executive Darren Woods predicted more investment in oil and gas, but acknowledged that oil companies were struggling to make big calls amid such uncertainty.

“These are multi-billion dollar investments with long-term horizons,” he said. “How do you think about that with the uncertainty associated with the transition? It’s a difficult balance to find. »

Extract of ExxonMobil chief predicts continued rise in oil marketsJune 27, 2022

Meanwhile, Shell chief executive Ben van Beurden said he would not reverse previous decisions to cut project investment. But he noted that the commodity shock of the war in Ukraine has finally caused governments to scramble to solve the various problems of the global energy system.

“On issues of energy security, energy balances, levels of investment, I’ve never had such good discussions with governments as we have today,” van Beurden told the Financial Times.

Extract of Shell van Beurden boss: “Supply must adapt but to less demand”July 20, 2022


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