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Irina Slav

Irina Slav

Irina is a writer for Oilprice.com with over a decade of experience writing on the oil and gas industry.

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A Scorching Hot Middle East Summer Could Send Oil Prices Soaring

Economies reopening after lockdowns and a consequent surge in travel have pushed crude oil prices to levels last seen years ago. Now, something else can push them even higher: the weather.

Summer is hot in the Middle East. It is peak power consumption season as air conditioners become vital. This year, according to a Bloomberg report, consumption will be even higher than usual due to higher temperatures.

The report mentions electricity consumption in Kuwait, which this week hit a new record as summer began earlier than usual. The report also noted that last year, Saudi Arabia burned 25 percent more crude for electricity production than normal. The Kingdom also said at the time that it may need to add 1 million bpd to its domestic consumption for electricity generation purposes.

On the face of it, and as the report suggests, this could push oil prices higher. Higher prices would be welcome for OPEC members, especially those in the Middle East. But it would also motivate buyers to look for alternative suppliers offering better bargains.

India already did that earlier this year when Saudi Arabia increased its prices for Asian buyers. The world’s third-largest oil consumer immediately cut orders for Saudi crude after Aramco hiked its official selling prices for Asian buyers by $0.40 per barrel in April. The short rift, which ended with Saudi Arabia lowering prices, demonstrated a change in world oil market dynamics. India now has more suppliers to choose from besides Middle Eastern OPEC members.

There is also another reason that the increased oil consumption of Middle Eastern states might not have a significant effect on prices even if the hotter-than-normal summer forecast pans out. All Middle Eastern OPEC members are sitting on some spare capacity because of their production quotas under the OPEC+ agreement that shrunk the excess global supply of oil by keeping production some 7.7 million bpd lower than before for months during the worst of the pandemic.

This spare capacity could take a while to get back online—about a month, per the EIA’s definition of spare capacity—but it is there, ready to tap when necessary. And it may become necessary despite the latest signs from OPEC+, which have shown members of the extended cartel would stick to their initial plans to add no more than 2 million bpd in production from next month. The thing that could—and likely would—push oil prices higher this summer would be primarily demand that is recovering faster than most anticipated, including the International Energy Agency, which recently called on the energy industry to suspend all new oil and gas exploration in the quest for net-zero emissions. Last week, that same IEA called on OPEC to bring back more production to avoid a further spike in prices.

Related: Dealmaking In U.S. Shale Patch Heats Up As Oil Prices Rise

Yet more oil may well be coming soon from a country exempt from the OPEC+ production cuts. Speculation about Iran’s return to global oil markets is rife, and there are doubts whether it would indeed be able to restore production as quickly as it says, but it will certainly try to do it.

The latest from Tehran is that Iran could go back to a daily average of 4 million barrels within 90 days. Most of this would be back online within a month, an official from the state oil company said, as quoted by Iranian state media this week. 

Higher than usual summer temperatures in the Middle East would challenge the region’s power grid. Still, it is unlikely to affect oil markets much or for very long. Prices are already high enough to make some buyers nervous. If they go much higher, they will dampen demand, and nobody wants this just when it is recovering so well. Gulf states may need to tap their spare capacity to keep a lid on prices or, if they are feeling adventurous, watch them rise closer to $100 and risk losing market share to the United States, Russia, and other suppliers who would be only too happy to step in and fill the supply gap.

By Irina Slav for Oilprice.com

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