October 08, 2021 | 13:48
Happy Days for OPEC+
These are ‘happy days’ for the world’s oil cartel. Beyond the fact that both crude oil and, more so, natural gas prices have zipped upwards in recent days due to energy/ power shortages in Asia and Europe, concerns over the cleaner energy transition (e.g., reliability of wind power) have also come to the fore. This is not to say the world’s decarbonization push is going to stall, but it has also become clear that the world will not be able to simply abandon fossil fuels overnight, which must sound very pleasing to the ears of the world’s major energy producers.
It therefore should have come as little surprise that OPEC+ sat tight earlier this week and stuck with its prior telegraphed decision to taper its production cut target by 400kb/d for the month of November. Recall OPEC+, after some internal infighting, had decided in July to increase production by 400 kb/d per month in August until September 2022. There had been some speculation that OPEC+ could surprise the market with a larger increase following calls from the United States to increase supply. Separately, President Vladimir Putin indicated that Russia would attempt to increase its supply of natural gas to Europe, though there are doubts of whether the country is truly willing or has the ability to do so due to low inventories.
On the flipside, OPEC+ may be becoming less concerned that much higher crude oil prices could dramatically incentivize new exploration and production or fastforward the move into renewable energy given developments over the past month. Meanwhile, it appears that the combination of rising ESG and shareholder demands to maintain capital discipline may actually be working in the favour of OPEC+, at least temporarily. A key gauge of whether capital discipline may be loosening is to watch the U.S. shale market, where production could quickly come online. Overall U.S. crude oil production sat at 11.3 mb/d last week, still well below the pre-pandemic peak of 13.1 mb/d, but had been steadily creeping upwards before Hurricane Ida struck.
Key Takeaway: Oil and gas prices appear to be well-supported for the time being. As a result, we have nudged up our annual forecasts for WTI to US$67.50/bbl in 2021 and $72.50 in 2022 (previously $65 and $70). In tandem, we have revised the forecasts for benchmark Henry Hub natural gas to US$3.85/mmbtu for 2021 and $4.00 for 2022 (previously $3.50 and $3.00).