The Fuse

IEA: Oil Price “Reprieve” On The Way

by Nick Cunningham | November 18, 2021

After months of oil prices steadily climbing amid a tightening market, the worldwide rally may soon take a breather.

Oil prices have already slipped back from recent highs. A new report says that oil prices are set for “a reprieve,” and that the market could flip into a state of surplus.

Rally running out of steam

Major crude oil benchmarks Brent and WTI hit seven-year highs in recent weeks in the mid- to upper-$80s per barrel. But by the middle of November, WTI was back below $80 and Brent was flirting with sub-$80.

The surge in prices in 2021 has caused pain at the pump and exacted a political price on those in power around the world, as escalating prices exacerbated pandemic-related inflation.

The surge in prices in 2021 has caused pain at the pump and exacted a political price on those in power around the world, as escalating prices exacerbated pandemic-related inflation.

But we may have just passed the high point for crude oil, according to a new report “The world oil market remains tight by all measures, but a reprieve from the price rally could be on the horizon,” the International Energy Agency (IEA) said in its November Oil Market Report.

The agency cautioned that demand was still rising steadily, but that supplies – hit hard from the pandemic and the collapse of oil prices in 2020 – are coming back. Global oil supply increased by 1.4 million barrels per day (mb/d) in October, and another 1.5 mb/d is expected to come back online in November and December.

In its own report, OPEC cut its forecast for oil demand, in part due to the result of high prices.

“When the trajectory of the oil market’s supply tightness is being challenged by both the IEA and OPEC, it’s difficult for the trading mood to not turn bearish,” Rystad Energy’s senior oil market analyst Louise Dickson said in a statement. “Prices are falling on forecasts that the world may see oil surpluses again from as early as next month, if OPEC expectations materialize, and last’s week’s projected build in US crude stocks offered no relief.”

The sudden softness in the oil markets, in many respects, was foreseen. For months some analysts have argued that the oil market was tight now, but would be flipping into a state of surplus as we move into next year, with OPEC+ adding 400,000 barrels per day with each passing month as it unwinds its pandemic-related production cuts. Demand is surging back close to pre-pandemic levels, but it has taken time for supply to catch up.

The U.S. may also be adding production. Not only has output returned from the Gulf of Mexico, where outages from the devastating hurricane in August lingered for months, but U.S. shale is starting to increase production a bit. That comes despite the widespread pressure from investors to impose “capital discipline,” a newfound mantra that has swept the industry.

In practice, that means that shareholders have demanded that oil companies hand over cash to them rather than using any proceeds from shale wells for new drilling. But private drillers, as opposed to publicly-traded companies, are less exposed to this pressure and are ratcheting up drilling. The IEA raised its forecast for U.S. oil supply for the fourth quarter by 300,000 barrels per day.

Meanwhile, there are other reasons why the oil market may be shifting back in a slightly bearish direction. China is releasing some oil from its strategic petroleum reserve, which appears to be coming as the U.S. government is inching in that direction as well.

China is releasing some oil from its strategic petroleum reserve, which appears to be coming as the U.S. government is inching in that direction as well.

At the same time, a resurgence of Covid-19 infections in Europe and to a lesser extent in China have raised the possibility of weaker-than-expected demand.

High watermark for oil prices?

The Biden administration has struggled to find an answer to expensive fuel, exploring ways to lower gasoline prices via a possible release from the strategic petroleum reserve, an investigation into anti-competitive behavior of the energy industry by federal regulators, and even looking at a ban on oil and gas exports. Most analysts believe none of those measures will do much to lower the price of gasoline, and that in reality prices are set by the global market.

It is important to note that OPEC+ itself continues to keep millions of barrels of oil production capacity per day on the sidelines, and has enough spare capacity to quickly lower global prices if it wanted to. But the group is sticking with its current plan of adding supply incrementally.

It is important to note that OPEC+ itself continues to keep millions of barrels of oil production capacity per day on the sidelines, and has enough spare capacity to quickly lower global prices if it wanted to.

Fortunately for motorists, the tide may be turning on the tight oil market, with lower prices potentially coming soon. To be sure, not everyone agrees with the IEA on this point.

“Meanwhile, 2022 oil market views are diverging, from ultra-bullish calls of +$100 to forecasts that reprieve is just around the corner in the first quarter of 2022 when global balances may flip to surplus,” Rystad Energy’s head of oil markets Bjornar Tonhaugen said in a statement.