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Tsvetana Paraskova

Tsvetana Paraskova

Tsvetana is a writer for Oilprice.com with over a decade of experience writing for news outlets such as iNVEZZ and SeeNews. 

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$70 Oil May Cause Slowdown In Demand Recovery


While the unexpected rollover of the OPEC+ production cuts sent Brent Crude prices up to $70 a barrel, the highest oil prices in more than a year could dampen global oil demand recovery, which the OPEC+ group itself still sees as fragile.

After the surprise OPEC+ move last week, crude oil prices rallied faster and higher than many forecasters had predicted just a week ago as the market expects supply shortages amid recovering demand.     

Oil at $70 a barrel is good for oil bulls, oil companies, and the oil-dependent budgets of most OPEC+ producers, but it is not good news for prices at the pump or oil-importing nations, including the key demand growth drivers China and India.

In addition, higher oil prices will put additional inflationary pressure on economies recovering from the pandemic slump, and raise the prices of many goods and services, including airplane tickets and imported goods in the United States, Dion Rabouin of Axios notes.

The immediate result of OPEC+ keeping production basically unchanged in April—with small exemptions for Russia and Kazakhstan totaling 150,000 bpd—will be higher gasoline prices everywhere, from the United States to India.

The upward pressure on gasoline prices had already begun even before the OPEC+ group surprised the market by rolling over production levels and Saudi Arabia keeping its extra 1-million-bpd cut into April.

The alliance's delayed easing of the cuts, however, puts $3 a gallon national U.S. average price within sight.

Recovering fuel demand in the United States on the one hand, and the rallying crude oil prices, on the other hand, could push the national average to above $3 a gallon by Memorial Day, GasBuddy said after the OPEC+ meeting last week.

Related Video: Can Saudis Defend Aramco from Houthis?

The last time the U.S. national average hit $3 per gallon was in October 2014. Three years ago, in 2018, the national average came close to the $3 threshold, at $2.97 per gallon.

"Extending the production cuts maintains a growing imbalance between demand and supply, and puts more pressure on oil prices to rise, should global demand continue to recover. A continued recovery seems likely, led by American motorists filling their tanks at the fastest pace since the pandemic began. I predict the national average now has 70% odds of reaching $3 per gallon, a level not seen since 2014, primarily due to OPEC's opposition to raising oil production," said Patrick De Haan, head of petroleum analysis at GasBuddy.

According to Pay with GasBuddy data, U.S. gasoline demand increased on Friday by 4.9 percent week over week, to its highest level since the pandemic began. U.S. gasoline demand hasn't seen a daily week-on-week drop since February 20, De Haan tweeted on Saturday.  

Consumers in India are also hit with high prices at the pump as the world's third-largest oil importer directly warned OPEC+ that its unexpected decision last week has the "potential to undermine consumption-led recovery and more so hurt consumers."

India and the world's top oil importer China—key global demand growth drivers—could slow down oil purchases at $70 a barrel in coming weeks and months, potentially undermining the recovery in demand.  Related: U.S. Sells 10 Million Barrels Of Oil From Strategic Petroleum Reserve

"The risk is these higher prices will dampen the tentative global recovery. But the Saudi Energy Minister, Prince Abdulaziz, is adamant OPEC+ must watch for concrete signs of a demand rise before he moves on production," Ann-Louise Hittle, vice president, Macro Oils, at Wood Mackenzie, said, commenting on the OPEC+ rollover.

The high oil prices are also expected to put strong upward pressure on inflation, which could accelerate beyond the Fed's targets and the targets of other monetary policy decision-makers around the world.

With the surprise OPEC+ move, OPEC's de facto leader and top global oil exporter Saudi Arabia is betting on overtightening the market to reap higher oil revenues in the short term, gambling on expectations that U.S. shale will look at higher profits instead of production this time, unlike in any of the previous oil price spikes in recent years.

"The kingdom might be pushing its luck if it pursues the hawkish path for too long," Vandana Hari, founder of Vanda Insights, told Bloomberg over the weekend. 

The highest oil prices in more than 14 months could hurt global oil demand recovery, the very indicator that the Saudis want significantly improved before moving to ease the production cuts.

By Tsvetana Paraskova for Oilprice.com

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Leave a comment
  • Horst Weindenberg on March 09 2021 said:
    The market forces are far too powerful. You can analyse it to death, but the undeniable facts before our eyes are the strong underlying fundamentals, very limited and daily decreasing supply availability, strong demand across Asia and worldwide. All the major banking and financial institutions predict a long industry boom lasting 10 years or more with $100 oil as the norm. Many new projects are getting the green light and kicking off later this year and next year to improve and expand our infrastructure. This is serious investment. Additionally, companies are actively recruiting new staff and consultants as we speak and gearing up for busy times ahead. This is a new dawn for the industry. There is no such a thing as Peak Oil. Oil is and always will be the energy of the future and right now from where I sit with actual facts, not opinions the future looks bright for everyone.
  • Mamdouh Salameh on March 09 2021 said:
    The role of OPEC+ is to maximize crude oil prices to the level that the global economic can tolerate. And with the global rollout of vaccines, the global economy is starting gradually to return to normal economic activities. This means that crude oil prices have a long way to go particularly that oil is now a bull market that could last several years.

    And contrary to claims, a $70 oil doesn’t slow down oil demand recovery. On the contrary, both the global economy and global oil demand are stimulated by high oil prices. The rationale is that the global economy is made up of three major chunks: the global investments, the global oil industry and the economies of the oil-producing countries all of which would be invigorated by higher oil prices leading to growth in the global economy and therefore global oil demand.

    In 2008 surging global oil demand sent crude prices to $147 but global demand didn’t collapse because of that price but because of the collapse of the US housing market that virtually brought down the global economy and the banking system to their knees.

    In my opinion, a fair oil price ranges from $100-$110. Such a price invigorates the global economy and stimulates therefore global oil demand.

    Brent crude could hit $70-$80 in the third quarter of 2021 with global oil demand returning to pre-pandemic level of 101 million barrels a day (mbd).

    Brent could be headed towards $100 in the second half of 2022 or the first quarter of 2023 because of a fast-tightening market and the possibility of a demand-supply deficit estimated at 10-15 million barrels a day by then triggered by a serious decline in global oil industry’s investments in oil projects.

    Dr Mamdouh G Salameh
    International Oil Economist
    Visiting Professor of Energy Economics at ESCP Europe Business School, London

Leave a comment

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