By Rhod Mackenzie
World oil prices rose sharply in July. North Sea Brent, which is important for calculating the price of Russian hydrocarbons and the size of the export duty, went up by $11 per barrel to $85. The monthly increase was the largest since February 2022, and specifically in July, the last time such an increase occurred two decades ago. This time, an increase in demand and a decrease in supply coincided at the same time, which allowed black gold to rise significantly, which had recently frozen in the $70-80 corridor despite any positive news for the market. Details - in the material "Izvestia".
Suggestion: manufacturers' asceticism
In recent years, OPEC+ countries have shown a level of restraint in production volumes unprecedented in the 21st century. Last year, the cartel members and the independent oil powers that joined them capped production by 2 million bpd, adding (or deducting) another 1.66 million bpd in April.In June, Saudi Arabia, considered the main stabilizer of the market, promised to cut July production by a million barrels, to 9 million barrels per day, one of the lowest levels in recent history. This self-restriction will be extended until at least August. Finally, Russia agreed to cut production by 500,000 barrels per day and will maintain this level until 2024. Considering that oil from our country is already sold at a certain discount in many markets, such a restriction looks logical.
In the 2010s, supply balancing was largely done by the United States , which has nearly doubled its production since the turn of the century due to skyrocketing shale production. They, in particular, did not allow prices to rise too much after similar restrictions from OPEC + in 2016 and subsequent years.
But now the situation is different. According to Baker Hughes, the number of drilling rigs in the United States continues to decrease, now down to 669. Compared to 2019, there are 406 fewer of them. According to Goldman Sachs forecast , the total increase in US oil production by the end of the year will be only 200 thousand barrels per day. That is, more than twenty times less than the representatives of OPEC + removed from the market. The reasons for the modest growth have already been described: this is the depletion of the most "fat" fields, and the reluctance of American oil companies to invest in production against the backdrop of an unfriendly ESG regime in the White House, and the desire of investors not to develop, but to fix profits.
To this we must add another leverage that the United States had - interventions from the strategic reserve. In March 2022, the Joe Biden administration announced the sale of 180 million barrels of these reserves to stabilize the oil market. The effect was not as significant as expected, but it played a certain role in establishing price equilibrium. As a result, the strategic reserve fell to 346 million barrels, the lowest in 40 years. Now we are talking about a partial recovery of reserves, which may entail additional pressure from demand.
To be fair, many countries have been ramping up their production in recent months. For example, Mexico, where production has been declining for a long time, will increase it by 80,000 barrels this year. Growth is recorded in Guyana, which has literally burst into the ranks of the world's major producers, and in neighboring Venezuela, sanctions against which are not really enforced now. A special line should be given to Iran, where, according to the local Ministry of Energy, production reached 3.1 million barrels per day, which is the highest since 2018, when the US imposed sanctions against the country due to the lack of progress on the nuclear deal. But all this is clearly not enough to replace the missing oil from Russia, Saudi Arabia and other OPEC+ countries.
Demand: looking forward to the future
However, a weak supply would still not be enough for such an increase in oil prices. In July 2023, the consumption record set in pre-pandemic 2019 was finally surpassed. Last month, demand amounted to 102.5 million barrels per day, which is 200 thousand more than the previous historical maximum. The driving season has played a key role in this, with all continents not seeing a significant shift away from petrol cars in favor of their electric counterparts. Bloomberg compared the amount of oil consumed in the world every day with 6.5 thousand filled pools. It can be stated that some bold assumptions about the upcoming peak of oil demand have not come true - and will not come true in the coming years. Agency columnist Javier Blas expects that this will definitely not happen before 2030.
In addition to seasonal factors, oil demand is driven by better-than-expected economic performance in the eurozone and especially the US, where GDP grew by 2.6% in the second quarter. China continues to fight for a quick exit from the lockdown-related slowdown in the economy and is likely to spur GDP with stimulus measures. In the meantime, China is actively stocking up on oil, taking advantage of a rather favorable market situation.
In the first half of the year, low demand, coupled with relatively high supply, created an excess of oil on the market by 800,000 barrels per day. In the second, the market will face a deficit of 1.2 million tons if the existing drivers remain in place. This could help oil quotes rise to $100 a barrel, which was the norm last year. Note that current quotes (unlike long periods) depend on speculative investors no less than on fundamental factors, and the turn towards higher oil prices has probably just begun.
It should, however, be understood that on a historical scale, taking into account inflation, oil is now not very expensive in dollar terms. For example, in the first half of the 2010s, its cost, adjusted for inflation, was the current $120–130 per barrel. So the long-term growth potential remains quite decent.
One of the consequences of the oil rally for Russia is the increase in the value of the Russian Urals benchmark (although its adequacy to real export deals is now in doubt). In Russian ports (Primorsk, Novorossiysk, Ust-Luga) it now costs more than $68 per barrel, which is already more than the price ceiling. The United States is trying to put pressure on importers of Russian oil, not least in order to reduce quotes in general, but it will be more difficult for them to realize their plan under the current conjuncture than before.
However, the rise in prices for export oil has not yet had a significant effect on the ruble exchange rate, which, according to Finance Minister Anton Siluanov, is caused by the situation with the trade balance. If the ruble exchange rate does not rise in the near future, there will be considerable reason to believe that not all oil companies return the received currency to the country in full.
This article orginally appeared in Russian at iz.ru