Who really wants to go back to oil at less than $20 a barrel, as Brent crude was in April? Or minus $38, where West Texas Intermediate (WTI) briefly fell the same month?
That was the extreme option offered up by one entry expert at the end of last week as crude came under selling pressure on global oil markets, with Brent slipping below the $45 level it has inhabited for the past few weeks, and WTI testing its $40 comfort zone.
Nobody wants crude back to the crazy levels witnessed on “Black Monday,” and it is unlikely to fall back there even in the worst-case scenario. But the wobbles in the crude market are giving pause for thought among the strategists who have, so far successfully, begun to rebalance supply and demand in global energy.
The main concern had been with demand. After an initial surge in demand as economies around the world began to reopen, led by China but with some positive signs also coming from the US, there has been a recent slowing since the end of July.
Bassam Fattouh, of the Oxford Institute for Energy Studies and one of the leading experts in the field, noted the improvement in oil demand up to the beginning of August, but said: “Since then, the demand rebound seems to have come to a sudden halt.”
Demand recovery in the US and India flatlined for most of August. China is still enjoying rising demand, but — after its big purchases of very cheap oil in the spring — seems to have enough for the time being to cater for its immediate needs. It is even having trouble offloading the crude it has sitting on ships at its ports.
Another important component of global demand, aviation, is still in the doldrums, and will probably have to await an effective vaccine before people start to feel comfortable about flying again.
With uncertainties in demand, it is more important than ever to get the supply side right. Since the historic cuts of April by the OPEC+ alliance led by Saudi Arabia and Russia, energy policymakers have largely done this. They have been aided by the fall-off in US production as shale feels the harsh winds of financial reality.
Nobody wants crude back to the crazy levels witnessed on “Black Monday,” and it is unlikely to fall back there even in the worst-case scenario.
OPEC+ has adhered to what the Saudis have called the Three Cs — cuts, compliance, and compensation. Under the current phase of the deal, about 7.7 million barrels per day (bpd) have been taken out of the market.
Compliance with these limits has been observed on a scale hitherto unknown among the disparate OPEC+ membership, with notorious overproducers such as Iraq and Nigeria getting close to 100 percent conformity and agreeing to make up for past oversupply with extra cuts going forward.
But just last week, some small cracks appeared in the unity of OPEC+ membership. The first came from an unlikely quarter — the UAE, long-time stalwart of the alliance and close confidant of Saudi Arabia.
The UAE said it had exceeded the production cap by some 103,000 bpd in August, mainly due to extra domestic demand because of peak energy requirement in the hot summer and more people staying at home. The UAE promised to cut back by the end of October to compensate.
More concerning was Iraq, not just because it has been a consistent laggard in the cuts agreement. The Iraqi oil minister was quoted in local media saying the country effectively wanted to opt out of the OPEC+ deal from next year, which would have been a big blow to an agreement scheduled to run until 2022.
The Iraqi oil ministry quickly disowned these reports, which it called “baseless,” saying that it was as committed as ever to OPEC+ and had hit 100 percent compliance with the targets in August, but opening the possibility of extending the compensation schedule.
At the moment, it looks as though both demand and supply worries are being overplayed in the crude price, and the broad recovery will continue, albeit with possible hiccups along the way.
As Fattouh said: “A key premise underlying the upward bias is that OPEC+ cohesiveness and high compliance will be maintained, and this represents a fundamental shift from previous cycles.”
• Frank Kane is an award-winning business journalist based in Dubai. Twitter: @frankkanedubai