Oil prices erased earlier gains and traded lower on Wednesday morning, following an estimate by the International Energy Agency (IEA) that no supercycle for oil is around the corner amid plentiful supply and a large global spare capacity.
Just after the weekly EIA inventory report showed a crude build of 2.4 million barrels for the week to March 12, WTI Crude prices were down by 1.11 percent at $64.03 as of 10:47 a.m. EDT, while Brent Crude traded down by 1.18 percent at $67.50.
Both benchmarks reversed earlier gains, which were fueled by the surprise estimate of the American Petroleum Institute (API) on Tuesday of a draw in crude oil inventories of 1 million barrels for the week ending March 12.
Oil prices turned lower after the IEA said on Wednesday in its Oil Market Report for March that it doesn’t see either a supercycle in oil or a looming supply crunch, as inventories still look ample, while OPEC+ has more than 9 million bpd of spare production capacity offline because of the cuts.
“Oil’s sharp rally to near $70/bbl has spurred talk of a new super-cycle and a looming supply shortfall. Our data and analysis suggest otherwise,” the IEA said in its Oil Market Report today.
As of February, OPEC’s spare capacity – excluding Iran – stood at 7.7 million bpd, most of it in the Middle East. Non-OPEC countries taking part in the deal hold an additional 1.6 million bpd that could be brought on to the market in short order, the agency noted.
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The IEA also said in its annual Oil 2021 report that global oil demand would take until 2023 to return to the pre-pandemic levels of 100 million bpd, but COVID-19 would change parts of consumer behavior forever, with global gasoline demand likely past its peak already.
A rising U.S. dollar ahead of Fed’s Federal Open Market Committee this week also weighed on oil prices as a stronger dollar makes crude oil more expensive for holders of other currencies.
In addition, the suspension of AstraZeneca vaccine shots in more than a dozen European countries has raised concerns about oil demand recovery in the region as vaccination campaigns in many countries were disrupted.
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By Tsvetana Paraskova for Oilprice.com
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speaks volumes about the shallowness of IEA’s research.
The IEA represents the world’s biggest consumers of oil (mostly western consumers) and therefore its motive is to provide its members with cheap oil. That is why its projections always aim to depress oil prices for the benefit of its members.
The IEA is now claiming that there is no supercycle for oil around the corner amid plentiful supply and a large global spare capacity. But this claim is based on such flimsy assumptions that it should be ignored.
Global oil inventories have seen a steep decline from 1.4 billion barrels at the height of the pandemic in April 2020 to an estimated 100 million (equivalent to one day’s global consumption of oil). The large spare capacity the IEA is talking about is OPEC+ production cuts currently 7.2 mbd but with the wider opening of the global economy, this capacity will disappear completely leading to a deficit in the demand-supply balance estimated at 10-15 mbd by 2022/23 and a hike in Brent crude price to $100 a barrel by the second half of 2022 or the the first quarter of 2023.
Oil prices are now definitely in a bull market that could last several years. Other than the economic stimulus packages, oil prices will be underpinned in 2021 and the coming years by a return of the global economy to normal business activities as a result of the global rollout of anti-COVID vaccines, a fast-depleting global oil inventories, almost complete compliance by OPEC+ with the production cuts, the insatiable thirst of China and India for oil, a very significant decline in the global oil industry’s investments and a declining US shale oil industry.
Furthermore, it is a very rare occasion when so many powerful bullish factors have joined hands and are pushing oil prices upward as manifested by the impressive surge in oil prices from $40 a barrel in early December to more than $69 two days ago.
The sustained surge in oil prices since December has given rise to speculation that oil prices are now in a supercycle, defined as a protracted upward rise in prices due to a structural shift in the way demand outpaces supply. On the other hand, what is being described as a supercycle could be a great pent-up force which both the global economy and global oil demand were unable to release while the pandemic was raging.
Still, there is evidence to suggest a new commodities supercycle could be already starting. For example, prices of precious and strategic metals particularly copper have gone through the roof this year and may still have more room to run. Copper, arguably the most critical of industrial metals, has burst beyond $9,000/mt for the first time in a decade. There is a risk copper could more than quadruple in value, taking oil prices into triple digits.
OPEC+ will have an important say in how the supercycle plays out in the way it responds to rising prices. While the seeds of a supercycle are being sown in 2021, whether it will bloom in later years remains very much dependent on choices still to be made by OPEC+, energy companies and policy makers in the months ahead.
Based on the above, a $100 oil is now in sight.
Dr Mamdouh G Salameh
International Oil Economist
Visiting Professor of Energy Economics at ESCP Europe Business School, London