What began as a power issue for a handful of US states quickly turned into a global supply shock for the oil markets; Brent crude surged to over $65/bbl overnight, a level not seen since April 2019. With production constrained, inventories drawing and vaccines promising a return towards normalcy, expectations continue to run high for oil markets.
The sharp rise in global oil prices before the March 4 OPEC meeting means the calculus for the OPEC+ alliance becomes more complicated on several levels.
On the demand side, rising oil prices could begin to drag on demand growth in developing market economies – India's sensitivity to higher oil prices comes to mind. On the supply side, individual members could push to ease curbs and spruce up their revenues significantly.
Rising oil prices might also clear the way for a faster US shale oil rebirth. So far, this possibility remains shelved as the consensus view has been that capital markets will continue to turn backs on US E&P producers to fund a sizable rebound in capital-intensive drilling.
Currently, the OPEC+ alliance is mostly complying with maintained production curbs agreed in January, keeping 8.1 mbd of supply from the market and boosted by an additional 1mbd of unilateral cuts by Saudi Arabia. Demand is also coming in stronger than expected, although the continued work-from-home policies and depressed international and business travel will remain a drag.
There is the possibility that Iranian oil could return to the market in higher volumes should the new Biden administration rejoin the JCPOA and relax secondary sanctions on Iran. Over the last couple of years, sanctions have kept some 2.2 mbd of Iranian oil out of global markets. On the face, there seem to be good reasons for both sides to agree. On the Iranian side, the economy appears to be in a worse state than in 2015. On the US side, the Biden administration has been vocal that the US should rejoin the JCPOA, including some sanctions relief, as long as Iran resumes compliance with the terms of the agreement
If Iranian oil came back, Saudi Arabia would likely increase its production rather than lose market share to its geopolitical competitor. While the new US administration is in no rush to reverse sanctions, it’s certainly a headwind for oil down the road.
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