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PEC+ decided on a symbolic oil production cut during its September 5 virtual meeting, despite pressure by many Western nations for the group to increase its output. The group, which includes Russia, shaved 100,000 barrels a day off its production target for October. Only a month ago, it had agreed to raise output by a similar amount for September.  

"Higher volatility and increased uncertainties require the continuous assessment of market conditions and a readiness to make immediate adjustments to production in different forms, if needed,” the group said in a statement after the meeting. The September increase was only intended for this month, it added.

The decision was viewed by some analysts as a snub to US President Joe Biden and European leaders, who have traveled to the Persian Gulf to request production increases to offset the higher energy costs they face at home. OPEC, led by Saudi Arabia, made its decision to prevent a further decline in oil prices.

OPEC+ got a short-lived reprieve – oil prices rose about 3 percent after the decision, then pared gains. West Texas Intermediate (WTI), the underlying commodity of the New York Mercantile Exchange's oil futures contracts, climbed as high as $123 a barrel in March after the start of the war in Ukraine, but dropped for three consecutive months from June as fears of a recession in many countries resulted in several heavy sell-offs in oil.

In August, OPEC+ had a different message. The group’s Secretary General Haitham al-Ghais told Reuters that global demand was still robust and would remain so through the year, adding that a recent sell-off in oil didn’t reflect fundamentals and was driven by fear. However, McKinsey and others project that global oil consumption will decrease substantially, with this decade as a turning point leading to lower demand through 2050.

crude oil prices, major indexes
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source: bloomberg

China’s economic malaise is also having an impact on oil markets.

Beijing’s decision to re-introduce Covid restrictions amid a property and banking crisis has added to the country’s economic woes. The world’s second-largest economy is now projected to grow just 3.5 percent this year, down from a previous forecast of 3.9 percent, according to Bloomberg’s latest quarterly survey of economists on August 29.

The global economy isn’t looking in great shape either. Investment and trade disruptions caused by the war in Ukraine, a drop in consumer demand, and the withdrawal of fiscal and monetary policy accommodation are weighing on economic growth. The World Bank revised its 2022 forecast in June, when the global oil selloff started, to 2.9 percent, lower than the 4.1 percent forecast in January.

Record inflation has forced central banks to raise their rates. In the Eurozone, inflation hit 9.1 percent in August, a record, and well above the two-percent rate targeted by the European Central Bank. The ECB hiked interest rates by 75 basis points on September 8, citing inflation that “remains far too high.”  In July, it brought to an end eight years of negative interests with an increase of 50 basis points.

Rising energy prices are causing public unrest in Europe.
Opposition groups in Germany started widespread protests demanding that the government tackle skyrocketing energy prices by removing sanctions against Russia. An estimated 70,000 people protested in Prague against the Czech government, calling on the ruling coalition to do more to control soaring prices.

final energy consumption per fuel, projected to 2050 (million terajoule)
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source: mckinsey

In Iraq, the latest clashes between Shi’ite Mulsim groups have so far not hurt the country's oil exports. State-owned oil marketer SOMO said that the country’s oil exports were unaffected by the unrest and that exports to Europe, which is in desperate need of oil as winter approaches, would continue.  

A resumption of nuclear talks with Washington is reviving speculation about additional crude flows from Iran. PVM Oil Associates in London wrote before the OPEC meeting that Iranian production could lead to OPEC cutting output, as it did, to keep prices at around $100 barrels a day.  

“Throw in the possibility of a new Iranian nuclear deal that could return up to 1 million barrels a day to the market and the case for an OPEC cut makes increasingly more sense,” PMV wrote before the September decision.

No wonder Saudi Arabia shifted gears as it defends oil prices. The world’s largest oil exporter signaled two weeks before the September meeting that it could decide to cut production as demand showed signs of weakening. The Saudi energy minister, Prince Abdulaziz bin Salman, a half brother of Crown Prince Mohammed bin Salman, said in an interview with Bloomberg in August that OPEC+ may be forced to act to bring stability to a “yo-yo oil market”  that he described as in a “harmful” state of “schizophrenia.”

capital investment in upstream (exploration) oil and gas
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source: ey, barclays

Global energy uncertainty and price volatility are likely to have an impact on US energy equities, though predicting the extent of this is difficult. If a recession hits, oil prices will remain weak, or possibly fall further. Slowing economic growth dampens demand.  

Goldman Sachs analyst Jeff Currie said he believes that oil prices will return to $120 a barrel as energy shortages start to impact the market. There are other factors that may push prices higher: oil service companies are facing equipment shortages, and geopolitical events could push outcomes in any direction.

If oil prices remain high, around $100 a barrel, it could be another bumper year. U.S. oil and gas companies had profits worth $73.5 billion last year on the back of high prices, according to EY. That compared to a loss of $86 billion the previous year.

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Posted 
Sep 12, 2022
 in 
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