Crude oil prices fell last week, notching their second weekly decline in the face of concern that rising interest rates could push the global economy into recession.
Yet the future of crude oil still seems bullish to many. Spare capacity, or lack of it, is just one of the reasons.
The global surplus of crude production capacity in May was less than half the 2021 average, the U.S. Energy Information Administration (EIA) reported on Friday.
The EIA estimated that as of May, producers in nations not members of the Organization of Petroleum Exporting Countries (OPEC) had about 280,000 barrels per day (bpd) of surplus capacity, down sharply from 1.4 million bpd in 2021. It said 60 per cent of the May 2021 figure was from Russia, which is increasingly under sanctions related to its invasion of Ukraine.
The OPEC+ alliance of oil producers is running out of capacity to pump crude, and that includes its most significant member, Saudi Arabia, Nigerian Minister of State for Petroleum Resources Timipre Sylva told Bloomberg last week.
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“Some people believe the prices to be a little bit on the high side and expect us to pump a little bit more, but at this moment there is really little additional capacity,” Sylva said in a briefing with reporters on Friday. “Even Saudi Arabia, Russia, of course, Russia, is out of the market now more or less.” Nigeria was also unable to fulfil its output obligations, added Sylva.
Recent COVID-19-related lockdowns in parts of China – the world’s largest crude importer – also played a significant role in the global oil dynamics. The lack of Chinese oil consumption due to the lockdowns helped keep the markets in a check – somewhat.
Oil prices haven’t peaked yet because Chinese demand has yet to return to normal, a United Arab Emirates official told a conference in Jordan early this month. “If we continue consuming, with the pace of consumption we have, we are nowhere near the peak because China is not back yet,” UAE Energy Minister Suhail Al-Mazrouei said. “China will come with more consumption.”
Al-Mazrouei warned that without more investment across the globe, OPEC and its allies can’t guarantee sufficient supplies of oil as demand fully recovers from the pandemic.
But the check on the Chinese crude consumption seems to be easing.
On Saturday, Beijing, a city of 21 million-plus people, announced that primary and secondary schools would resume in-person classes. And as life seemed to return to normal, the Universal Beijing Resort, which was closed for nearly two months, reopened on Saturday.
Chinese economic hub Shanghai, with a population of 28 million-plus people, also declared victory over COVID after reporting zero new local cases for the first time in two months.
The two major cities were among several places in China that implemented curbs to stop the spread of the omicron wave from March to May.
But the easing of sanctions should mean oil’s price trajectory will resume its upward march.
In the meantime, in the U.S., the Biden administration is eying tougher anti-smog requirements. According to Bloomberg, that could negatively impact drilling across parts of the Permian Basin, which straddles Texas and New Mexico and is the world’s biggest oil field.
While the world is looking for clues about what the loss of supply from Russia will mean, reports are pouring in that the ongoing political turmoil in Libya could plague its oil output throughout the year.
The return of blockades on oilfields and export terminals amid renewed political tension is depriving the market of some of Libya’s oil at a time of tight global supply, said Tsvetana Paraskova in a piece for Oilrpice.com.
And in the ongoing political push to strangle Russian energy output, the G7 was reportedly discussing a price cap on oil imports from Russia. Western countries are increasingly frustrated that their efforts to squeeze out Russian energy supplies from the markets have had the counterproductive effect of driving up the global crude price, which is leading to Russia earning more money for its war chest.
To tackle the issue, and increase pressure on Russia, U.S. Treasury Secretary Janet Yellen is proposing a price cap on Russian crude oil sales. The idea is to lift the sanction on insurance for Russian crude cargo for countries that accept buying Russian oil at an agreed maximum price. Her proposal is aimed at squeezing Russian crude out of the market as much as possible.
So the bullish pressure on crude oil markets doesn’t seem to be easing.
Toronto-based Rashid Husain Syed is a respected energy and political analyst. The Middle East is his area of focus. As well as writing for major local and global newspapers, Rashid is also a regular speaker at major international conferences. He has provided his perspective on global energy issues to the Department of Energy in Washington and the International Energy Agency in Paris.
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