OPEC+ decided last week to continue current production cuts until the end of the year.
The announcement was not surprising, but oil prices have fallen significantly and OPEC+ production cuts may already be triggering what many are calling the cure for oil prices: even higher prices. This led to the suggestion that there might be.
However, it may still take some time for oil prices to start having an impact on demand. As always, the question is how high? Answer: Probably a little more expensive.
Indian oil minister this week warned As for the unintended consequences of OPEC+’s production cuts, he said it was OPEC+ producing countries’ right to decide how much oil to supply, but they should not be “indifferent to the consequences.”
“And it could become a self-fulfilling prophecy where demand goes down because people don’t have the capacity to sustain it,” Hardeep Singh Puri added.
According to Bloomberg julian lee, demand destruction is already underway. In the United States, gasoline consumption this driving season was 600,000 barrels per day below the average for 2019, the last pre-pandemic year of assumed normal demand.
Additionally, the latest EIA inventory report showed a significant increase in gasoline inventories, reinforcing the view that fuel demand is weak. Unsurprisingly, that structure was one of the factors weighing on prices this week.
But while demand may weaken in the U.S., demand is rising in other parts of the world. China, India and Brazil are all seeing increased demand for oil, Li points out. He says this growth just needs to get stronger to offset the decline in demand elsewhere.
However, this depends on the cause of the demand destruction. And when we talk about US demand, it wasn’t the price that destroyed demand. During the summer driving season, oil was well below $90 per barrel. This could be due to inflation, which is still rising despite consistently high consumer spending. It might just have been that year. Meanwhile, China’s oil demand is “surging.”
Goldman Sachs commodity analysts recently said that “China’s oil demand is supported by record domestic liquidity, as evidenced by robust congestion and domestic flight data.” Saidpointed out that domestic copper demand is rapidly increasing due to the low-carbon energy industry.
Despite the government’s concerns about prices, India’s oil demand remains very strong, driven by the fact that the country relies on imports for more than 80% of its oil consumption.Despite warnings on prices, India’s oil minister this week Said Even if oil prices exceed $100 a barrel, the country “will manage.”
Either way, this seems to be where most observers see oil heading. The last company to join the $100 a barrel club was Norway’s Equinor, whose chief economist said: predicted “I wouldn’t rule out the possibility of prices reaching $100 a barrel,” he said, adding, “It’s not because OPEC wants to get there. I don’t think they’re aiming for that price. No,” he added.
In fact, Eirik Warness makes an excellent point that others have also made recently. OPEC+ as a whole, Saudi Arabia and Russia have no interest in seeing oil prices soar. They recognize the nature of the solution to rising oil prices. So, as before, what they’re doing is a fine balancing act of keeping prices high enough for producers, but at least not killing demand too much.
This is the important issue at stake. Can the global economy continue to do well as oil prices rise to near or above $100, or will there be fallout that ultimately destroys even more oil demand?
For now, the economy appears to be doing well, with persistent concerns about interest rates, recession and consumer spending. Meanwhile, Rystad Energy’s latest peak oil demand forecasts continue to come in. A Norwegian energy consultancy offered a surprise this week. Predict Oil prices are about to plummet thanks to plentiful supplies and peak oil demand growth.
The forecast runs counter to observations from Equinor’s chief economist, who said tight global production capacity is part of the reason oil prices could soon exceed $100 a barrel. It also goes against what OPEC has long warned about: a lack of investment in new production that ultimately jeopardizes global supply conditions.
For now, the market appears to be reasonably well-supplied despite Saudi and Russian cuts. But most analysts say the balance seems precarious, with losses looming. Once officially announced, it will reveal just how elastic oil demand has become over the past few years, or how inelastic it continues to be. And that may settle the debate about peak oil demand, at least for a while.
Written by Irina Slav for Oilprice.com
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