CARTELS EXIST to exert control. This year the Organisation of the Petroleum Exporting Countries (OPEC) and its allies have occasionally seemed to prefer chaos. In March Saudi Arabia and Russia began a price war just as covid-19 crushed demand, akin to staging a fight atop a sinkhole. The group agreed in April to slash output, but at a big meeting in December oil ministers took days longer than expected to decide their next steps. The deal that emerged on December 3rd was a relief to the market, as the group agreed to lift production in January by a modest 500,000 barrels a day.
Beyond January, however, OPEC and its allies planned not to plan. Any changes to production will be decided in monthly meetings. That is in part because it is difficult to predict oil’s recovery. It is also because the new year may mark the beginning of a new strategy.
It is a risky time to test new tactics. The oil market has begun a faltering comeback, with China refining a record 14.1m barrels a day in October and demand picking up in India, too. Promising data on vaccines in November helped buoy prices to their highest levels since March. But storage tanks and ships are still swollen with some 3.8bn barrels of crude, nearly 10% above the level the same time last year, according to Kpler, a data firm. Brent crude, the international benchmark, jumped to almost $50 on December 4th, after the OPEC deal. By December 8th prices had dipped again, as optimism about Britain’s covid vaccine roll-out was doused by uncertainty over further lockdowns.
Yet it is plain that key oil producers are tired of limiting output in ways that support rivals. Capping production to maximise prices makes sense in a world of infinitely growing demand and scarce resources. However oil demand may soon peak, if it hasn’t already, due to energy efficiency, electric cars and rising support for climate regulation. In that context, saving oil riches for later looks increasingly misguided. Furthermore, competitors are happy to free ride on OPEC’s cuts. In 2016 the cartel and its partners agreed to curb production, providing a price support. That boosted American frackers and depressed OPEC’s market share, from 38% in 2016 to 34% last year.
Russia’s reluctance to support American oilmen spurred the price war in March. In recent months the United Arab Emirates (UAE), a core OPEC producer, has aired its own objections. Like Russia, the UAE has worked to raise output (see chart). By 2030 it hopes production capacity will climb by nearly 25%, to 5m barrels a day. To that end, in November it said it had found 24bn barrels-worth of oil tucked beneath Abu Dhabi. OPEC’s new deal reflects an eagerness to ensure such efforts pay off. The cartel and its allies want to provide oil markets with some stability, but not enough to lift output significantly elsewhere and chomp at their own market share. “You can’t assume blindly that OPEC will always be there to support prices,” says Damien Courvalin of Goldman Sachs, a bank.
That uncertainty may continue to weigh on shale production in 2021, further draining investors’ appetite to finance more capital spending. On December 8th America’s Energy Information Administration forecast that the country’s oil output would reach 11.4m barrels a day by the end of 2021. That is up from 11.2m barrels a day in November but still below the 12.2m average for 2019.■
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This article appeared in the Finance & economics section of the print edition under the headline “Opening the taps”
Source: Finance - economist.com
