Oil Price Reaches Seven-year High
By Malcolm Ramsay
As oil prices have hit a seven-year high this week, the outlook for breakbulk demand in the sector remains highly volatile as a tight market threatens to throttle growth.
U.S. oil benchmark West Texas Intermediate soared to reach almost US$80, a price last seen in 2014, following a meeting of OPEC+ on Monday to decide future output. Ministers from the OPEC+ cartel agreed a slight increase in output but resisted pressure to raise volumes substantially to meet soaring demand.
Jed Bailey, managing director of research consultancy Energy Narrative, predicts that while prices will remain high for the foreseeable future the link to long-term investment, and breakbulk demand, is no longer as clear as it once was, telling Breakbulk that “These dislocations between supply and demand across global supply chains will likely continue. Emerging covid variants and gaps in vaccination coverage across countries and regions make it virtually impossible to accurately forecast short term demand or foresee supply chain bottlenecks.”
The tight oil market is expected to create further supply chain disruption for the rest of this quarter at least, helping to support record high charter rates for multipurpose vessels well into 2022. Maritime consultancy Drewry estimates that any decline in the current trend of soaring multipurpose rates has now been pushed back into 2022, with little sign that supply chain issues will ease this year.
Economic Reverberations
Despite calls from the US and leading industrial nations for OPEC+ countries to significantly boost output on Monday, the oil consortium stuck to its original plan for a gradual increase, adding just 400,000 barrels per day in November. Prices for Brent crude topped US$82 a barrel for the first time in three years.
“The decision by OPEC+ to add the expected 400,000 bpd in November triggered a market reaction, as traders are now more boldly coming out from their cautious positions and pricing in a confirmed, tighter supply market,” Bjornar Tonhaugen, Head of Oil Markets at research firm Rystad Energy, comments, “after the initial reports of OPEC+ agreeing to maintain its modest supply boost – the market enthusiastically priced in the coming supply tightness.”
Bailey of Energy Narrative predicts this tightness of supply risks derailing the tentative global growth in the fourth quarter as logistics operators struggle to gain access to fuel and prices rise even further. “The current surge in energy prices (oil and also natural gas and coal in many parts of the world) is part of the economic reverberations caused by the sudden collapse--and equally sudden revival--of economic activity,” he notes, “In the near term, much depends on how cold the northern hemisphere's winter will be and if a covid variant triggers new lockdowns in key segments of the global economy.”
Energy Transition Volatility
The scarcity of oil is further compounded by soaring gas prices which are driving many generators in Asia to switch from gas to oil, further increasing prices, as well as the global acceleration of clean energy projects which has dampened investment appetite.
While the U.S. has plead for oil output to rise, the Biden administration is hamstrung by its own ambition to cut reliance on fossil fuels ahead of COP26 climate talks in the UK next month. Helima Croft, head of global commodity strategy at RBC Capital Markets, expects the Biden administration will now face a tough decision on whether it adds further pressure on Saudi Arabia to dampen down prices or accepts the current tight market.
Bailey forecasts that price volatility will remain a factor throughout the energy transition as pressure to reduce the use of fossil fuels is counteracted by the reality that oil and gas continue to make up the majority of supply, making it harder for breakbulk operators to predict which projects will be greenlit.
“Sequencing this transition to keep supply and demand in balance is no easy feat and is made much more difficult when demand is highly uncertain owing to the economic dynamics … as well as shifting weather patterns,” Bailey said.
Tonhaugen notes that “The recovery of the economy, the potential of a cold winter and fuel switching from gas to oil in Asia suggest a rather quick demand increase to as much as 100 million bpd in December…Producing nations, and namely OPEC+, have to be careful not to allow prices to inflate too much, otherwise we may see an adverse reaction that could negatively impact post-pandemic economic growth.”
Gas Development
The tight oil market is helping to drive development of several major gas plays, set to support demand for breakbulk over the medium term. One of the largest currently under development is the Argentina’s giant Vaca Muerta shale play, which has emerged as the world’s fastest growing major shale basin, according to Rystad.
“Although complete data for September is not yet available, there is no doubt that the third quarter of 2021 will set a new record for the number of horizontal wells put on production in Vaca Muerta, with Rystad Energy estimating that the POP count will reach around 73 oil and gas wells,” Artem Abramov, head of shale research at Rystad Energy, said.
The results are welcome news for breakbulk operators that have been reeling from a sharp shift away from oil and gas projects in several core markets. Coupled with spiking oil and gas prices in the third quarter, this suggests that the outlook for new investment may be improving sharply towards the end of the year.
“This surge from Vaca Muerta is poised to lift Argentina’s country-wide oil production to the highest level in years, with the play’s competitiveness also rising against US basins,” Abramov said. “There is no doubt that an average development in the Vaca Muerta oil zone delivers significantly higher production rates on a barrel of oil equivalent basis than an average U.S. onshore tight oil well
In Qatar, plans for development of the world’s biggest single non-associated natural gas field, North Field, have progressed this quarter with Qatar Petroleum committing to invest at least US$28.75 billion in the North Field Expansion. The firm said it will select all partners for first phase by early next year and reach a final investment decision on the second phase in the first quarter of 2022.
