The madness of the oil market


Here’s a chart of the oil value.

In the previous two years, oil has been traded as cheaply as $19 a barrel (or beneath zero when you have been shopping for a US mix known as West Texas Intermediate) and as excessive as $139 a barrel.

We haven’t seen such large swings in the oil value since the 2008 monetary disaster, when oil crashed from $150 a barrel to beneath $40 as fears of a worldwide recession noticed demand collapse.

This time round, the volatility of the oil value has been brought on by a number of components: the Covid-19 pandemic; the vitality transition; under-investment in new tasks; politics inside Opec, the cartel of 13 main oil-producing international locations; and above all by the unpredictability of Russia.

The end result has been distress for motorists, a pointy spike in inflation, and a blame sport in the US forward of midterm elections in November.

FT Edit has distilled the finest of the FT’s oil value protection to clarify what’s driving the market and why volatility is more likely to proceed.

A value battle throughout the pandemic

As the world started to lock down in the face of the Covid-19 pandemic in early 2020, halting journey and shuttering factories, an apparent response would have been for oil-producers to slash their output.

Instead, Russia determined to maintain pumping as a way to depress costs to the level the place US shale oil producers, with their larger prices, would lose money on every barrel.

[Russia] had bristled as shale manufacturing spiralled ever larger because of its price-supportive cuts with Opec. Washington’s determination final month to sanction the buying and selling arm of Rosneft, the state-controlled Russian oil champion, solely deepened Moscow’s animus in opposition to the US oil patch.

In the background was Igor Sechin, Rosneft’s boss and shut confidant of President Vladimir Putin. He was lengthy against the cuts with Opec and personally affronted by the new sanctions. The coronavirus disaster supplied a chance to strike. “This action was not about the oil market. It was about egos and getting even,” mentioned one Opec delegate.

Extract from Eight days that shook the oil market — and the world, March 13 2020

In flip, Saudi Arabia determined to combat Russia for market share and moved to flood the market with oil, elevating manufacturing to an all-time peak of 12m barrels a day and reducing costs by as a lot as $8 a barrel.

The timing couldn’t have been worse. As Saudi Arabia opened the faucets demand cratered, as increasingly international locations went into lockdowns round the world.

Eventually, the Trump administration succeeded in convincing Saudi to chop manufacturing and permit costs to stabilise. Opec agreed to begin reducing 9.7mn barrels a day of manufacturing in May, slightly below a 3rd of its every day output.

But earlier than the cuts got here into pressure, the world’s storage tanks had already stuffed up, and main hubs comparable to Cushing, Oklahoma had nowhere to place any extra oil. At the finish of April, the world noticed the oil value in the US flip damaging for the first time, as merchants began to pay individuals to take oil off their arms.

Front web page of the Financial Times on April 21 2020 displaying US oil went damaging

The issues of the vitality transition

But geopolitics was not the solely factor inflicting wobbles in the oil market. The ructions of the pandemic accelerated requires oil corporations to hurry up the vitality transition, as decrease oil costs pressured the US shale sector to take a $300bn write down, and already sceptical traders offered off shares in Big Oil.

Chart showing that oil producers have suffered deep losses

After writing off billions from the worth of its international oil property in June, BP mentioned it will evaluate its exploration plans and mentioned cuts would “better enable us to compete through the energy transition”. Shell additionally vowed to “adapt to ensure the business remains resilient”.

As the oil majors begin to step again from investing in new exploration and manufacturing, the world is changing into extra reliant on state oil corporations.

Can nationwide oil corporations pump sufficient?

As lockdowns lifted in direction of the finish of 2020 and oil demand ticked up, Opec+, a gaggle that features the authentic 13 Opec members and one other 10 international locations, together with Russia, solely elevated manufacturing a small quantity, arguing that the virus may trigger additional financial disruption.

“The recovery has not been even across the world,” mentioned officers on a Opec+ ministerial committee monitoring the historic supply-cuts deal. They advisable that the expanded group of international locations together with Russia ought to take “further necessary measures” when wanted. [ . . . ]

Amrita Sen at consultancy Energy Aspects mentioned Saudi Arabia and its companions inside and out of doors Opec are “hoping for the best, but preparing for the worst”.

“Asian demand — a key destination for Middle East oil — is broadly picking up, but consumption in the west is going the other way. It’s so difficult to forecast anything,” she mentioned.

Extract from Opec retains technique below wraps in oil stumble, September 22 2020

But the group was additionally constrained by the ageing infrastructure of some of its members, comparable to Nigeria and Angola who didn’t even hit their share of the comparatively modest manufacturing goal.

Russia begins a battle

Prices spiked once more when Vladimir Putin invaded Ukraine in February 2022. European international locations have been initially cautious of placing sanctions on vitality as a result of of their dependence on Russian gasoline, however by May the EU had agreed to ban seaborne Russian oil by the finish of 2022.

The bloc additionally took the alternative to stress the want for a transition to different vitality suppliers, and greener options, pledging to spend €195bn.

On Wednesday, the European Commission will unveil a €195bn plan geared toward offering cures, emphasising the want for extra renewable vitality, decrease consumption and dependable different suppliers. But the plan may even mark an try by Brussels to knit collectively the EU’s vitality infrastructure in a extra cohesive approach, eliminating bottlenecks and ending delays to tasks comparable to the Midcat pipeline.

“If we had made these interconnections when they were agreed [with France in 2014 and subsequently], Europe would not now be in this situation of dependency [on Russia],” mentioned Portugal’s prime minister António Costa when he met counterparts from Italy, Spain and Greece in Rome in March.

Extract from Europe’s push to plug its vitality gaps, May 16 2022

A unstable future

The scale of the vitality transition, and geopolitical uncertainty, are more likely to cling over the oil market effectively into the future.

ExxonMobil’s chief govt, Darren Woods, predicted extra funding in oil and gasoline however acknowledged that oil corporations are struggling to make huge calls throughout such uncertainty.

“These are multibillion-dollars investments with long time horizons,” he mentioned. “How do you think about that with the uncertainty associated with the transition? That is a difficult balance to strike.”

Extract from ExxonMobil chief predicts persevering with surge in oil markets, June 27 2022

Meanwhile Shell’s chief govt Ben van Beurden mentioned he wouldn’t reverse earlier choices to chop again on investing in tasks. But he famous that the commodity shock from the Ukraine battle has ultimately set governments scrambling to handle the varied issues in the international vitality system.

“On energy security matters, energy balances, investment levels, I’ve never had as good a set of discussions with governments as we are having today,” van Beurden instructed the Financial Times.

Extract from Shell boss van Beurden: ‘Supply needs to adjust but to less demand’, July 20 2022

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