Oil prices climbed to their highest in more than eight months on November 25 fuelled by continuing hopes that energy demand will recover once a COVID-19 vaccine becomes available.
Brent crude rose 75 cents, or 1.6%, to settle at $48.61 a barrel, its highest since early March, Reuters reported, adding that US West Texas Intermediate (WTI) crude also closed at its highest since early March, rising 80 cents, or 1.8%, to $45.71. Both benchmarks, which gained 4% on November 24, rose for a fourth straight session.
“I think the oil prices now are reflecting future recovery – recovery that’s going to happen two quarters from now there hopefully,” Alexei Kokin, a senior oil and gas analyst at UralSib Financial Corp in Moscow, told New Europe by phone on November 27. “Before we get there, before we get to the point where there is a clear path forward towards a demand recovery, we will probably have to wait a couple of quarters because I don’t think these vaccines will be in action or will be making a difference to public health before mid 2021 so what the market is saying now is that we don’t really care – traders and oil companies and whoever – they don’t care that much what happens between now and then, they are just pricing in the future recovery,” Kokin added.
The Organization of the Petroleum Exporting Countries (OPEC) and leading non-OPEC producers led by Russia, a group known as OPEC+ is leaning towards delaying next year’s planned increase in output despite a rise in prices. OPEC+ ministers are due to meet from November 30.
Rising Libyan oil production is adding to the concerns about oversupply in the market. Kokin said OPEC+ will probably extend their production cuts in January at their meeting next week. “They probably will because it’s the right thing to do when you have production growing,” he said, reminding that production from OPEC-member Libya is not bound by the quotas and is growing following a ceasefire between rival groups.
Kokin also reminded that oil production in the United States is also increasing. “The US is actually growing and January is usually a bad month for the balance in the market so it’s probably the right thing to do. I think the big risk for OPEC and the threat to the existence of OPEC+ will come when the market starts recovering, when demand starts recovering big time, then I guess we will incentives for every major producer with spare capacity to start pumping,” Kokin said. “But that’s not happening overnight so for the time being they are all in the same boat and I think they are going to extend the quotas for a quarter and then later, maybe next summer there might be a kind of a race whoever wins market share is kind of ahead of anybody else. So, that risk will remain but for later,” the UralSib expert said.
As the OPEC+ meeting is approaching, several OPEC members have voiced disagreements with cartel policy. The United Arab Emirates (UAE) and Iraq want to pump more oil. “I think what’s going to happen is we will hear a lot of noise. We will hear a lot of statements all over the place without any clear indication of direction for a couple of days but it will probably end the same way. It will end in agreement. We will just hear a lot of noise in the meantime. I just don’t think Iraq or the Emirates will go as far as to derail the whole thing because it’s not in their interest,” Kokin said.
OPEC Secretary General Mohammad Sanusi Barkindo, during the Crescent Ideas Forum on November 23 via videoconference, highlighted the devastating impact of the coronavirus, the deadly toll it has taken across the world and the blow it has dealt to many economic sectors, especially crude oil.
“We are heartened by the promising vaccine developments, and the hope that they can quickly be brought to market to save lives, first and foremost, but also to help reboot the global economy,” he said in comment’s posted on the OPC website.
Nonetheless, the oil market today is overshadowed by the resurgence of COVID-19 and a slower pace of economic recovery than we had envisioned in the second half of the year, the OPEC Secretary General said.
In this respect, OPEC outlook for 2020 oil demand is now slightly above 90 million barrels per day. “This represents a sharp decline of nearly 10 million b/d from where we started the year, and almost an 11 million b/d contraction compared to what we forecast for the year back in January,” Barkindo said.
In 2021, OPEC expects growth to bounce back to 6.2 million b/d, to just over 96 million b/d, compared to our pre-coronavirus expectations for demand reaching almost 102 million b/d next year, he said, adding that the recent revisions are due to the easing pace of the economic recovery and recent COVID-19 containment measures, which are assumed to impact transportation and industrial fuel demand well into next year.
Saudi Arabia and Russia reportedly summoned OPEC+ for last-minute talks on November 28. Russian Deputy Prime Minister Alexander Novak and Saudi Energy Minister Abdulaziz bin Salman, requested an informal video conference with their counterparts from the Joint Ministerial Monitoring Committee, which includes Algeria, Kazakhstan, Iraq, Nigeria and the UAE, Bloomberg reported.
“We are talking about keeping the old schedule, the schedule that was originally agreed or switching to a slightly modified version of the same schedule so in both cases OPEC is still keeping the cuts,” Kokin told New Europe, adding, “I think that’s what (Russian President Vladimir) Putin and everyone else is saying the cuts will be there, they will remain but how much exactly is going to be produced in January is a slightly different issue”.