What’s Next for the Global Oil Market?

Coronavirus is out of the driver’s seat when it comes to the oil and gas market, leaving Saudi Arabia and Russia at the wheel, according to energy experts.

What’s next could come down to what these two drivers want.

“If they want to keep prices rising, they can keep a tight rein on supply and push inventories even lower,” Mark Finley, fellow in energy and global oil at Center for Energy Studies at Rice University’s Baker Institute, said during a recent OTC Live webinar. “But at what point does that become counterproductive? At what point does higher prices push U.S. drillers back into the game?”

OPEC+ agreed in April to ease production cuts of about 7 million bbl/d today by adding 350,000 bbl/d in May and again in June. By July, the group will add another 400,000 bbl/d as Saudi Arabia also phases out its additional voluntary cuts of 1 MMbbl/d.

RELATED: OPEC+ Sticks to Plan to Ease Oil Output Cuts Beginning in May

The move was another step in the group’s continued efforts to stabilize the oil market following last year’s pandemic-fueled crash, which saw prices briefly turn negative. In the months since, vaccine availability had added to hopes for economic recoveries across the world as travel picks up and refineries, specifically those in the U.S., recover from harsh winter weather.

The OPEC+ production group, however, has a lot of surplus capacity.

“Even after this summer’s planned output increase, the group’s production will still be 6 million barrels a day below reference at pre-production levels. That’s a lot of spare production capacity,” said Finley, a panelist on the webinar moderated by the Baker Institute’s Ken Medlock.

“What it means is that with our two new drivers at the wheel, the group can increase production anytime they want. That should help keep a lid on prices going forward, if that’s what they want. It also serves as a warning deterrent to people who are considering investing at these prices.”

The Power Couple

Riyadh and Moscow learned from the April 2020 oil price collapse, and the two are cooperating closely despite disagreements about strategy, said Jim Krane, Wallas S. Wilson fellow for energy studies at the Baker Institute.

“Saudis are often over complying with cuts. Some of that’s due to their own views of the market. Some of that’s due to their willingness to retain that OPEC leadership and shoulder more than the burden,” Krane said. “They’re also allowing Russia to bring … Russian production online earlier than everybody else.”

Russia also benefits from cooperating, he added, noting it gains increased influence in the Middle East, including countries with close ties with the U.S.

“We know Vladimir Putin likes to insert himself in between the U.S. and its allies, and he’s doing a fantastic job of that here,” Krane said, after also pointing out Russia’s acceptance of Saudi’s desire for higher oil prices despite Russia’s low fiscal breakevens. “I would expect geopolitical drivers to keep Russia cooperating with Saudi Arabia and OPEC.”

Market watchers are also paying attention to Iran.

Iran’s production is inching up with exports, mostly to China, at about half of pre-sanction levels, Krane added. Efforts are underway to bring the U.S. back into the 2015 nuclear accord with President Joe Biden in office.

RELATED: Iran Deal Parties Seek Nuclear Talks Momentum, US Briefs Gulf States

“It’s a nice confidence-building measure if things are progressing, but a good way to put pressure on Iran if things start stalling,” Krane said. “In doing that, reinvigorating those sanctions would create some stress, not just with Iran, but also with China, which appears to be more willing than usual to kind of test the U.S. these days and test Biden’s, you know, get tough on China policy.

It could also create some stress with India, where Krane said refiners want Iranian crude as India has been “upset about the price hawkishness within OPEC and Saudi Arabia.”

Resisting Temptation

The U.S. Energy Information Administration’s Short-Term Energy Outlook forecasts WTI crude oil averaging $58.89 for 2021, up from $39.17 in 2020 but set to fall to $56.74 in 2022. Brent is also forecast to see similar ups and downs, forecast to average $62.28 in 2021, up from $41.69 in 2020 set to drop to $60.49 in 2922.

WTI was hovering around $62/bbl on April 27, compared to about $12.17 a year ago.

Don’t forget about U.S. shale.

“The rocks are still there,” Finley said. “Under the right circumstances, domestic shale producers certainly have the potential to raise output significantly.”

Will they resist temptation?

“Most analysts expect that at these prices, the rig count should drift higher, and along with that, later this year, we should expect to see a modest production increase,” Finley said. “U.S shale could grow much more rapidly. The Dallas Fed’s surveys, for example, show that a lot of U.S. shale operators are in the money at these prices. But even so, most producers and their investors seem determined to avoid temptation, seeking instead to maintain spending discipline and aiming to return cash to investors rather than plowing it back into growth.”

RELATED: ConocoPhillips Resumes $1.5 Billion Share Buybacks on Capital Discipline Pledge

Data from Baker Hughes Co. show the U.S. land rig count at 426 for the week ending April 23, down 22 from a year earlier, as drillers rebound from record lows seen at the height of the pandemic and global oil oversupply.

In all, U.S. crude production is at about 11 MMbbl/d. Finley said there isn’t much prospect for increased global oil production this year beyond the OPEC+ increases. The rig count increase in the U.S. has been supplemented on the shale side by a drawdown of DUC inventory, he said. Further, operators have been cutting costs and increasing productivity. However, “All of these positives so far have only served to offset the decline rate of the base of production, which is very high in the U.S.,” he said.

Demand Picks Up

Global oil demand could change everything. Emerging virus variants, vaccine uptake pace and how quickly travel returns, however, add to demand uncertainty.

After last year’s monumental pandemic-drive demand declines, the world’s need for more energy is picking up.

“The International Energy Agency [IEA] in Paris projects that after falling by 9 million barrels a day last year, which was the biggest decline ever recorded, worldwide oil demand this year is likely to grow by about 6 million barrels a day, which in turn would be the biggest increase ever recorded,” Finley said.

Sequential growth is expected each quarter through 2021, with global oil demand just one million barrels below pre-COVID levels by the fourth quarter, he said, citing the IEA’s forecast. “And by the way, the IEA is on the low side of forecasters. Other analysts are expecting growth this year to exceed 7 million barrels a day.”