October 1, 2022

The last party in the oil market

2021-06-04 16:28:13

The Organization of the Petroleum Exporting Countries (OPEC) and other major crude producers led by Russia, a group so-called OPEC+, agreed on June 1 to continue gradually increasing oil production.

“OPEC+ is in a very good position and I would have thought they had a very pleasant meeting this week because they can certainly see that they are out of the woods in terms of short-term oil risk,” Chris Weafer, co-founder of Macro-Advisory in Moscow, told New Europe by phone on June 3, noting that there is a recovery in demand in the big oil markets.

“They are now looking at what should be a very strong period for the oil price lasting possibly up to the end of the decade but certainly in a three-to-five-year view and that is because of the expected decline from the big international oil companies and western producers. It’s on the assumption that the decline in demand will continue on a more a gradual and slow basis, in other words it’s not going to fall off the cliff, people will not suddenly en masse switch to electric vehicles,” he argued.

“Now it’s becoming clear that the transition from hydrocarbons to electric, particularly in passenger vehicles and in transportation is going to be a slow process rather than a very rapid one and therefore OPEC+ producers have realistically confidence that their market share is going to grow over the next three to five years and that they will be in a better position to control the price. So, that then leads them to the decision of this week,” Weafer said.

Russia’s position is that needs to rebuild production on a steady even gradual basis because of its geology and its geography. “It cannot simply turn the production back on in one period whereas Saudi Arabia, the Emirates and some other Gulf producers can do that. Because of their geology, they can restore production very quickly. Russian cannot – it needs a much longer lead in time and therefore that’s why they have always been pressing for the recovery in volumes,” he said.

According to Weafer, Saudi Arabia and other OPEC producers are now happy to comply with Russia’s demands to gradually increase production. “They see the rising demand in the big markets and they see this changing backdrop in the oil markets that is absolutely shifting the competitive advantage to the OPEC+ countries – Russia and OPEC. It is down to extreme pressure from the environmental groups on shareholding companies and, in turn, the international companies as well as the regulations being imposed by the Biden Administration and to a lesser extent by the European Union,” the Macro-Advisory expert said.

“In that sense, there is no doubt that this likely period of strong advantage for the oil producers could very well be the last party in the oil market,” he said.

Weafer stressed that the momentum away from hydrocarbons and towards renewable and green energy and electric transportation, will pick up. “That momentum is irreversible. It is going to continue. It’s absolutely inevitable but it’s not going to happen that quickly,” he said. “You can talk about a three-five, up to eight-year transition period where the oil producers will make a great deal of money during that transition period and that what OPEC+ looking at least,” Weafer said.

Turning to Iran, Weafer said the prospect of more Iranian crude, as talks on reviving its nuclear deal make progress, will have a small effect on oil prices. “It certainly seems a little bit strange that OPEC is ignoring Iran because if they were to restore the full production that could add approximately 1.5 million barrels to the global market,” Weafer said.

However, he noted that Iran is producing and exporting a lot more oil than the official data. “It’s quite clear from the anecdotal evidence that China has been buying a very large volume of Iranian oil at very discounted prices. So, in that sense, the question mark is well actually how much oil has Iran cut and, therefore, how much can come back. And the assumption is it’s nothing like a million and a half even if they were allowed to go back to full production because they are already producing a lot of that unofficially and sending it into the market,” Weafer explained.

Moreover, he said that even with 1.5 million extra barrels from Iran, that’s much less important than the decline in US shale. “US shale is two million barrels down what it was pre-Covid and the expectation in early 2020 was that US shale would even add a couple million barrels in the next few years. So, the fact that now looks like US shale production is capped at the current level and could very well decline in the next few years and we are seeing a decline in production from other more traditional western sources, essentially the view is that OPEC can live with Iranian production returning,” Weafer said, noting that the possible return of Iran’s oil is not going to slow the market.

He recalled that when Libyan oil returned to the market, it did not cause an oversupply. “Libyan oil did the same thing. This time last year Libyan oil was only a couple hundred thousand barrels and day and now the first quarter it was up by 1.2 million barrels. So, more than one million extra Libyan barrels of Libyan oil returned to the oil market late last year and it was absorbed. It did not slow down the oil market,” Weafer said, adding, “So, I think the sense is that the Iranian oil, some of it is already out there anyway, but even if it wasn’t, a full recovery is not going to disrupt the market because the oil demand is robust and you are seeing a decline of US shale. So, in other words, they can live with it”.

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