14 July 2021 Analysis Of The Week: Pain at the Pump

Analysis Of The Week: Pain at the Pump​

The Story

“The last oil price boom may be in sight” predicted business advisory firm Boston Consulting Group in a recent paper (New York Times). The latest OPEC+ agreement, however, does not seem to be.

The OPEC+ (Oil Petroleum Exporting Countries Plus) cartel comprises 23 nations including Russia, and is dominated by Middle East crude oil producers. Between them, they coordinate the production of much of the world's oil supply and, in doing so, they influence its price.

The energy alliance’s meeting on 1 July 2021 should have been relatively straightforward, with analysts expecting the group to boost production from August. But the meeting collapsed, and crisis talks to reconvene on Monday 4 July were abandoned.*

There is no new date for a meeting and the Saudi-UAE relationship appears to be worsening (Financial Times), leaving oil markets in a volatile state of limbo. On 6 July 2021, Brent crude, the international benchmark, hit a three-year high of $77.84, and US benchmark West Texas hit a six-year high of $76.98 (The Economist).

The United Arab Emirates (UAE), a member of OPEC since 1967, is not breaking away yet, but this move could be on the cards – and could lead to a battle for market share, as “pumping out as much oil as possible is seen as the key to securing Abu Dhabi’s post-oil future” (Financial Times).

*Update: As of 14 July 2021 (as this newsletter was being circulated), OPEC has reached a compromise with the UAE.

Click to expand...

The Background

As 2020 travel restrictions kicked in around the world, demand for oil tanked, and a price war led to oil prices briefly dropping below zero. Since November, though, prices have risen by 85% (New York Times).

Under a 2020 agreement, OPEC+ Members are keeping around six million barrels a day of potential production in the ground (New York Times). At the recent meeting, the majority of OPEC+ countries agreed to a steady increase, bringing production to 2 million barrels a day by December 2021. The sticking point, though, was the second key proposal: to extend current production cuts from the agreed endpoint of April 2022, through to December 2022 as the world recovers from the pandemic.

Concerns about the longer-term future of the oil industry are shaping agendas. Both the UAE and Saudi Arabia, the world’s largest oil exporter, are focused on diversifying their economies away from hydrocarbon exports. Having invested billions of dollars in their production capability, the UAE requested a reassessment of their baseline, giving it freedom to pump out more oil. However, Saudi Arabia and Russia were against this (BBC), with the consensus being that if the UAE were allowed to raise its oil production quota, other OPEC+ members would want to follow suit (CNBC).

What It Means For Businesses And Law Firms

The rapid run-up in oil prices comes at an already uncertain time for the US economy. In contrast to the six-year highs, almost a third of the US’s 11 million barrels a day are being sold for around $55 a barrel. Some of the US’s biggest oil groups are being left severely out of pocket, after ‘hedging’ contracts signed during 2020’s price crash are now forcing them to sell at a discount (Financial Times).

There may be a renaissance in US domestic production, though the Biden administration’s push for greener energy sources is another powerful factor. Environmental initiatives, such as putting particular birds and animals onto the endangered species list (Wall Street Journal) are part of the frontline war against hydrocarbons. In the UK, production from the UK continental shelf peaked in 1999, reaching 137 million tonnes (Mayer Brown). The Oil and Gas Authority (OGA) announced the North Sea Transition Deal on 24 March 2021, which sets out plans to comply with the government’s net-zero emission agenda.

The longer-term prediction for oil output is still up for debate. According to the Financial Times, “Some oil watchers predict output will peak but then plateau at levels roughly the same as today. Others expect that when the peak arrives, the subsequent fall in demand will look more like a drop from a cliff edge”. Meanwhile, pouring some of that oil onto the troubled waters of OPEC+ may be a drop in the ocean.