When oil ministers from the world’s largest fossil-fuel nations meet via webcam this week to make decisions about the global oil market in 2021, they could be forgiven for indulging in a little early festive cheer.
Oil prices have more than doubled since tumbling below $20 a barrel and hitting 21-year lows during “black April” – when Covid restrictions brought major economies to their knees, and caused what is thought to have been the worst month in the history of the oil industry.
The mood within the Organisation of Petroleum Exporting Countries (Opec) may be more buoyant still following a rally of almost a third in the past month alone as vaccine news offered the first hopes of a true recovery for the global economy. The price of a barrel of Brent crude is currently about $48, while the US oil price is about $45 a barrel.
By the end of the year, then, a return to $50 a barrel is possible. But this victory for Opec’s “petronations” has not come without compromise, and many within the cartel may be eager to shrug off the production restrictions that have helped prop up the price of oil.
This is the question oil ministers must answer this week as they decide how far they can go to loosen the strict limits on how much oil will be produced and exported next year.
Earlier this year, Opec and its allies agreed a record oil production cut of 9.7 million barrels a day – or 10% of global production – which marked an end to the bitter price war between Saudi Arabia and Russia.
A new plan to allow an extra 2 million barrels of oil a day back into the global market could pose a risk to its fragile recovery, but keeping the historic production cuts in place risks further economic pain for those Opec members that rely on oil to fill the country’s coffers.
Opec will need to take a very careful reading of the global economic outlook. US banking giant Goldman Sachs, one of the most authoritative voices in the global oil market, believes that the oil market is ripe for a comeback in 2021 – after a “winter speed bump” of renewed Covid-19 restrictions – as demand for natural resources returns. However, others are less convinced.
Russ Mould, an investment director at online broker AJ Bell, has warned that the jury is still out on whether the effect of the pandemic on the global economy will be inflation, stagflation or deflation.
“The bond market still seems convinced that inflation and growth are going to remain subdued for some time, but commodities appear to be telling a different story,” he said. “The Bloomberg commodities index stands at a two-year high and if raw material prices really start to motor, they could start to fuel expectations of higher inflation all on their own.”
Goldman has also warned that the two-day meeting risks reigniting tensions that have smouldered within the cartel over the past year. The potentially devastating price war that threatened to break out between two of its leading members in the spring emerged not long after the authority of the cartel was shaken by Qatar’s decision to give up its membership. News reports this month suggest that the United Arab Emirates may follow suit.
“As another Opec+ meeting nears, uncertainty on the group’s decision is once again rising,” Goldman analysts said in a note last week. “Beyond the outcome of another quota decision, however, there are renewed concerns about the future of the organisation.”
Opec may have won the battle of 2020, but the year ahead could still mean war.