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OPEC Anticipates Economic Recovery
A common refrain in 2020: Oil prices took a massive hit this year. Indeed, the US crude oil futures markets went haywire in April when WTI prices went negative—an anomaly owing to scarce storage. The spot price for Brent crude, the global benchmark, approached $10/barrel in April. This cratering followed a devastating one-two punch in early 2020. As for many other commodities, demand for hydrocarbons effectively halted amid COVID-19-induced economic shutdowns. But Saudi Arabia and Russia simultaneously ramped up production as they engaged in an ill-fated (ill-timed, certainly) oil price war. As the world slowly climbs out of economic malaise—particularly China, the world’s second-largest oil consumer—and OPEC relations return to something resembling normalcy, it seems logical to expect oil markets to also return to normal. As is often the case, reality is likely to prove slightly more complicated.
After days of debate, OPEC+ (OPEC nations plus some Russian oil producers and other partners) agreed to a compromise production increase of 500,000 barrels a day starting in 2021, postponing plans to incrementally boost output in December. The agreed increase is a modest step toward reversing April’s 10mn bbl/day cut. OPEC+ will have to balance the occasionally conflicting desires to simultaneously return to prior output levels and keep oil prices from falling—if not see them rise. Entirely reasonable debate on the degree to which OPEC really controls oil prices anymore aside, it’s not hard to envision a few wrinkles as OPEC+ increases output. Among them:
The United States, recently a net oil exporter but not an OPEC member, plays a notable role in the global supply/demand balance. Swings in global oil prices affect the economics of the marginal barrel produced in the US. As WTI prices rise alongside Brent, more US shale wells become economically viable, theoretically leading to increased US production. So OPEC’s success in improving prices could inadvertently cause a corresponding increase in US supply to pressure them.
Meanwhile, demand in many emerging markets, the largest oil consumers, hasn’t recovered, as manufacturing remains offline/depressed. India, the third-largest oil consumer, experienced a 39% fall in manufacturing demand in Q2 2020. It recovered somewhat in Q3, but its manufacturing PMI fell to three-month lows in November. Russia faced a similar dip in November. China's PMI, however, has improved for the ninth straight month, indicating a possible tailwind for crude oil demand.
It’s that sliver of optimism OPEC and the oil market need to turn into a trend before letting wells flow at full capacity again.
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