The rise in the price of oil does not reach a ceiling

The architects of the post-pandemic world draw a green reconstruction, of mills moved by the wind, panels capturing energy from the sun, and cars circulating thanks to electrical energy. China, the US and the EU, the three superpowers, and at the same time, the biggest polluters on the planet, are aligned to reduce emissions to a minimum in the coming decades. The decline in oil has been around for a long time. And yet, when the light begins to shine at the end of the pandemic tunnel thanks to vaccines, its price has experienced a spectacular comeback, appreciating more than 40% in the last six months, which has led to the barrel of Brent and the West Texas above $ 60, its highest level since January 2020, making any field profitable.

Why is the price of one of the most reviled assets rising? The experts consulted cite a host of factors: substantial supply cuts from producing countries, especially Saudi Arabia’s decision to reduce its pumping by one million barrels a day in February and March, is helping to rebalance the market and sustain prices. ; Growing optimism about the global economic recovery anticipates an increase in oil demand that is already a fact in the Asian giants China and India; Investors betting on a return to inflation have taken refuge in raw materials; the dollar remains weak; And the unusual frost that plagues the central and southern United States has hit Texas, the oil state par excellence, causing blackouts and hindering supply.

Some are short-term issues that will dissipate soon, but prices can navigate higher, taking advantage of background trends as well. Rystad Energy analyst Paola Rodríguez-Masiu highlights one of them: the lack of investment. “And without the necessary investments, production falls faster than demand,” he says. There is more. In an intervention on the CNBC chain, Goldman Sachs expert Jeffrey Currie sees among the future catalysts the positive impact of the construction of green infrastructures, which he believes will move the economy and generate employment thanks to the injection of the stimulus plans promoted by the new tenant of the White House, Joe Biden, and the European Union. Paradox: ecological change can fuel the value of black gold before the big substitution.

Currie is among those who believe that the price of a barrel still has a long way to go: he assured the Financial Times that he does not rule out that it exceeds $ 80. Advocates of the arrival of a new oil supercycle insist that the languishing supply due to the transfer of investments to the green model and the long period of low prices will lead to a decoupling with the growing demand encouraged by public stimuli, which will generate shortages and it will allow the barrel to continue adding dollars to its price. But the debate divides analysts. ING has raised its median price for 2021 from $ 60 to $ 65, and its chief commodities officer, Warren Patterson, does not expect prices to stay above $ 70 this year on a lasting basis. “The OPEC + countries would probably ease production cuts if prices strengthened too much,” he argues.

Nor does Rodríguez-Masiu expect the streak to trigger prices. “Iran could return to the market, demand continues to not recover, and other energy sources that compete with oil will account for part of its growth: the economy is in the process of decarbonisation in key sectors such as electricity, vehicles that consume diesel and gasoline they are more and more efficient, and there is more penetration of the electric car ”, he lists.

Andreas Economou, a specialist at the Oxford Institute for Energy Studies, sees divergences between expectations driving prices and market fundamentals. “While the recent spike generates overwhelming enthusiasm from analysts, it is important to be aware that the recovery in global demand to pre-crisis levels will come gradually during 2021 and 2022.” The predictions of those like JP Morgan’s Chrystian Malek, who forecast a barrel above $ 100, sound like siren songs. And it lists three reasons that should act as a brake. “Even if we assume that on the supply side there may be difficulties due to lack of investment, there are sufficient short-term reserves to meet demand. Furthermore, prices that are too high are detrimental to both importers and exporters, and producing countries have reasons to defend a ceiling price with the same determination as they now protect a floor price. Finally, in the past, levels above $ 100 were only seen in a scenario of strong demand, stagnant supply due to lack of investment, limited reserve capacity and geopolitical disruptions, something that is not happening for now ”.

These reasons are joined by another. Although Biden has made environmental arguments for not granting new licenses to drill on federal territory, he has not prohibited the fracking, and Rodríguez-Masiu believes that if prices rise enough they will boost their production quickly, given that there are already enough concessions. That wild card would fatten supply and cool prices in the event of overheating.

ING’s Patterson estimates that the great recovery in demand will take place in the second half of the year, although he does not expect this year to return to 2019 levels. Among the risks that the Dutch entity sees to hinder this return to the normality there are health, economic and political hypotheses: the arrival of new waves of the pandemic due to the spread of more aggressive strains, the impact of any indication that the Federal Reserve intends to reduce its bond purchase program, or a rapid return to the The market for Iranian barrels, now vetoed by US sanctions, would change the playing field in the middle of the game. Also that there is no agreement between the OPEC + countries on production cuts at their next meeting on March 4.

Meanwhile, excess storage continues to be liquidated, one of the clearest consequences of the confinements. Nobody forgets when last year the sector reached a limit situation when the space to store the excess oil of a world paralyzed by the virus ran out. The West Texas price of a barrel sank even below zero dollars, a cataclysm never seen before. Once the huge inventories are cleaned up, Andreas Economou believes that more or less investment in new supply capacity will determine the future of prices. Its evolution is closely followed by central banks vigilant of an eventual rebound in inflation and states dependent on importing fuels that may see their bill increase.

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