Rodney Berry-El fills his gas tank in Falls Church, Va., on Tuesday, June 8, 2021. The pandemic has worked out far better for the group of oil producers known as OPEC Plus than might have been expected a year ago, as prices have been gliding higher since November, up 85 percent to about $75 a barrel for Brent crude, as global economies begin to consume more oil while the group keeps a tight leash on output; Image: Alyssa Schukar/The New York TimesT
he pandemic has worked out far better for the group of oil producers known as OPEC Plus than might have been expected a year ago. After a self-destructive price war, and a brief episode when some oil prices fell below zero, Saudi Arabia, Russia and their allies have emerged in a position that may be stronger than when the lockdowns began.Prices have been gliding higher since November, up 85% to about $75 a barrel for Brent crude, as global economies begin to consume more oil while OPEC Plus keeps a tight leash on output.As the oil producers prepare for their monthly meeting Thursday, there is growing talk that the price could eventually hit $100 for the first time since 2014.The Organization of the Petroleum Exporting Countries and its allies are holding some high cards at the moment. More and possibly explosive growth in demand is expected in the coming months as economies recover from the coronavirus pandemic. Crude oil
production in the United States, a nemesis for OPEC in recent years, has been slow to recover from a precipitous drop in 2020 as investors in producers lean on the management to restrain spending.“If I was an OPEC Plus producer, I would feel pretty comfortable with the way things are,” said Neil Atkinson, an independent oil analyst.These relatively short-term trends are occurring amid a broader shift for oil markets, as concerns over climate change lead to actions that will ultimately reduce fossil fuel consumption. While these concerns weigh on the oil industry’s future, some analysts say they may contribute to further price rises
over the next couple of years.“The last oil price boom may be in sight,” analysts from the Boston Consulting Group, a business advisory firm, said in a recent paper.According to such thinking, enormous stimulus programs in the United States and Europe will spur record growth in economies, leading oil consumption to soar, perhaps above pre-pandemic levels. At the same time, oil supplies will struggle to keep pace, for a number of reasons.Oil companies reacted to the steep drop in prices and demand in 2020 by slashing investment
in drilling for oil and gas. Pressured by regulators, courts and investors to curb their carbon emissions, oil companies have begun to pump more capital into clean energy like wind and solar. As a result, they may be slow to increase spending to bring additional oil to market just as more drivers take to the road and airlines schedule more flights.“The supply side and its financiers are losing their appetite for oil more quickly than the world’s consumers, putting key OPEC Plus countries firmly in the driver’s seat,” analysts from Energy Aspects, a research firm, wrote in a recent note to clients, which forecast $100-a-barrel oil in 2023-25.In fact, while many European and U.S. oil companies are cutting back on oil and gas investment, the Saudis and other OPEC Plus producers are expanding.Of course, there are also plenty of skeptics who predict that today’s relatively high prices may prompt drilling for additional oil that will eventually cool off the market.“I would have thought that more investment in the U.S. shale patch would be very, very tempting for the better-positioned producers and those with deeper pockets,” Atkinson said.Output from shale rock can be increased quickly.The key question for Prince Abdulaziz bin Salman, the Saudi oil minister and chair of the OPEC Plus meetings, is how quickly the group should feed into the markets the 6 million barrels a day or more of oil production that it is now keeping shut in the ground. Under an agreement reached in April 2020, the group plans to continue to hold to the same output levels into early 2022.Analysts doubt that OPEC Plus will stick to the letter of this deal — demand is likely to rise too fast — but Abdulaziz tends to lean toward caution on production increases, shrugging off forecasts of roaring consumption. At recent meetings he has warned that the impact of the pandemic is not over and that unleashing too much oil could wash away the gains of the last year.“I take my guidance from what I see today,” he said during a news conference June 1. “I am not taking any guidance from a projection.”
This go-slow approach, which will most likely be reinforced by the prospect of more Iranian oil
coming on the market in the future, has led OPEC Plus to trail the recovery of demand in opening the taps, a lag that pushes prices up.There have already been consequences for consumers. In the United States, average gasoline prices of about $3.15 a gallon are already close to $1 a gallon higher than they were a year ago.Prices have risen not because of an overall shortage of oil but because OPEC Plus countries — especially Saudi Arabia and other Persian Gulf producers, like the United Arab Emirates — are leaving oil in the ground. The Saudis and their allies can decide when to release more oil, giving them powerful sway.“They need to be willing to give that supply,” said Amrita Sen, head of oil markets at Energy Aspects, a research firm. “Before that, we are stuck.”As the world’s largest oil exporter, Saudi Arabia may be the key decision-maker in OPEC Plus, but its officials are wary of wrecking the group’s cohesion by frustrating other important members. Russia and the United Arab Emirates are among the members that would like production to increase.
Some analysts predict that the Saudis may agree to a modest increase of perhaps 500,000 barrels a day, or to a deal that would raise production later in the year. OPEC Plus has already agreed to gradually lift production by about 2 million barrels a day over the three months ending in July.
Abdulaziz will also probably have in mind the negotiations between Iran and other nations on reviving their nuclear deal. U.S. sanctions
have throttled Iranian oil sales, but if the talks are successful Iran, which has already increased sales to China, could lift production by 750,000 barrels a day by the end of this year from current levels, and almost double that by the middle of 2022, the International Energy Agency forecast recently.But the impact of Iran’s potential return to the markets can be overstated. Much depends on timing and if global demand continues to escalate. If OPEC Plus keeps the squeeze on output, price pressures could build this summer, analysts say. Even Iran’s additional production may not radically change that picture.After all, said Jamie Webster, a senior director at the BCG Center for Energy Impact, a consulting unit, the best time to release additional oil on the market “is at this point, when you have pretty strong demand growth.”
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