Major oil producers making up the OPEC group of countries sent crude prices (and company shares) tumbling Monday after a deal to increase supply. And it may be for the best — for the oil producers.
Oil prices dropped 7% on Monday after OPEC and its allies agreed to increase stockpiles by 400,000 barrels per day starting in August.
Part of the move downwards is certainly wariness around new coronavirus cases and different variants risking lockdowns. Yet this is not a repeat of last year’s collapse to zero. It is a Brent crude coming down to sniff the air just below $70 a barrel (well above a 5-year average) as economies continue to recover.
The OPEC move is essentially on plan, albeit a little later than expected, following some drama in agreeing quotas with the United Arab Emirates. It only halts what has been a year-long steady rise in the commodity’s value. And that rise has persisted despite energy transition goals, which put a bullseye on the future of oil for automotive transport and other industries.
Earlier this year, representatives from Russia, Saudi Arabia and Qatar warned that the world will continue to rely on oil for decades to come and that reduced investment would only increase prices.
The cartel supply move may not do much on halting prices as economies continue to recover. Goldman Sachs, for instance, forecasts oil to reach about $80 before the end of the year. And that comes amid a lingering supply overhang.
But OPEC is clearly back in charge. It’s cooling the market, not destroying it. The threats to OPEC rule, aside from the pandemic, are not imminent. Renewables require new fleets of cars, which still need to be sold in scale beyond the boutique Tesla customer. U.S. shale producers are cautious, opting to deliver investors returns rather than output. Major oil producers have already scaled back output investment strategies (not that it is helping their share prices at the moment).
It was little over a year ago that OPEC+ essentially fell apart and was being written off as an organization on the relentless rise of shale. The world’s largest exporters, Russia and Saudi Arabia, abandoned quotas that they’d carefully managed for years and engaged in a price war. U.S. shale producers were doing their “drill baby drill” thing.
The pandemic put the exporters’ group back in order. New strategies from Euorpean and U.S. oil majors certainly seem to relinquish a larger portion of the pie to cartel producers. Shale producers appear more apt to remain in free-rider positions, at least through the pandemic, which looks to linger.
If the energy transition is going to bring sunset to the oil industry, it will be a glorious sunset indeed, at least for the near term.