Suggested $100 oil unlikely given abundance of OPEC capacity

According to a new report by Bloomberg Intelligence (BI), a supply gap big enough to push crude to a speculated $100 a barrel is unlikely, especially as OPEC has spare capacity of 9.2 million barrels a day. BI says that expected post-virus demand growth added to spending cuts and underinvestment during 2020’s downturn is driving calls for a higher oil price and a supercycle that BI deems misplaced.

Calls for Brent to hit $100 a barrel — a level last seen in 2014 — look overoptimistic to BI in the contact of OPEC’s vast 9.2 million barrels a day (mmbpd) of spare capacity and the potential reemergence of more U.S. supply if the oil price edges higher. Post-pandemic fiscal stimulus — combined with a potential drop in supply due to oil companies’ underinvestment — are pushing up some forecasts and prompting calls for an oil supercycle. A significant shortage of supply, due to lower spending and a rapid recovery in crude demand, could create a midterm supply-demand disconnect. However, largely unutilised capacity suggests a near-term price hike to $100 a barrel is remote, according to the report.

BI added that some signs of a recovery in demand and continued OPEC+ output cuts have driven up Brent to $63 a barrel — a 30% increase since December — though BI believes a much more significant and quick demand boost would be needed to create a supply gap sufficient to push the price close to $100. Wide global vaccine rollouts and a revival of long-haul travel is essential to boosting oil demand closer to its pre-pandemic level — which appears unlikely this year. Jet-fuel demand could still be more than 50% lower in 1Q, BI analysis shows, having accounted for almost 8% of global oil demand prior to the pandemic.

According to BI analyst Salih Yilmaz: “Non-OPEC output — which could come back online if the oil price stay high for a long period of time — combined with OPEC’s near-record spare capacity, may keep the crude price in check.  As last year’s global output adjusted to the new reality of a relatively low oil price, some higher-cost non-OPEC production came offline — mainly U.S. shale, Canadian oil sands and the North Sea — which could re-emerge if crude keeps rising. If the U.S. rejoins the nuclear agreement negotiated by the Obama administration, we calculate Iran’s output could increase by almost 1.5 million barrels a day, adding to the abundance of available global supply.”

 

 

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