The start of March posed some difficulties for crude prices, as they paired back some of the gains from the long run in February.
Of course, that might just be profit-taking, as the run-up has been pretty long. Or there might be an external factor, like some issue with the covid vaccine roll-out.
But, in fact, the latest addition to the vaccine armory came from JNJ on Friday, before the price of crude took a tumble.
The thing is, we’re heading into what is to be a pivotal meeting for OPEC’s executive committee. After holding together a shaky alliance to cut production during the pandemic to stave off another dramatic fall in prices, now it appears that key members are looking to raise production.
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After all, even rich oil nations need funds to help pay for covid expenditures.
What are we looking for
Notably, WTI prices fell after we heard that OPEC wanted to increase production. That wouldn’t be terribly out of line, since expectations are for the world economy to recover substantially in the next few months as vaccines continue.
Particularly, the largest petroleum consumer, America, is likely to see substantial vaccination rates before the end of spring. It takes some time for oil to actually be produced and delivered to customers, so ramping up production now makes sense.
However, the increase being talked about was in the order of 1.0-1.6 million barrels a day. We should remember that the initial agreement was a 9.7 million cut.
But that was after Russia and Saudi Arabia massively increased their production in a market bidding war. The real cut was from 30M bbl/day to 24.2M bbl/day.
Since then, production has risen to 27M bbl/day. An official agreement to raise production by over a million barrels a day would put production almost back to pre-pandemic levels.
When it would happen
At the start of the year, there was a bit of a surprise with Saudia Arabia voluntarily curtailing production by 1.0M bbl/day to boost prices until April.
So, a 1.6M increase is more of a 0.6M increase over where the market was reasonably expecting. This in line with recent production increases. And it wouldn’t change the curve we’ve seen since the bottoming out of crude production and prices.
While considering the demand for oil, we have to be mindful of its nearest competitor: natural gas. LPG prices have been on the rise after President Biden has already taken measures to slow new exploration of natural gas through fracking.
It doesn’t stop current production, nor new production on private land. Meanwhile, inclement weather has concurrently driven up demand.
About 13% of the US’ electricity can switch between oil and natural gas as an energy source. Many homes and industrial appliances have flex-fuel capacity. Not only has the price LNG returned to pre-covid levels, but it has also far exceeded them.
Also, unlike crude, it’s substantially harder to transport, particularly across the ocean. This makes it a more domestic-demand product.
As OPEC+ considers their production targets for the next couple of months, it would be useful to keep in mind the price ratio for thermal output between natural gas and crude.