Oil exporters are stepping on the gas to keep ahead of pandemic-exit consumption. That may slow defections to alternative fuel sources.
Saudi Arabia-led OPEC and Russia agreed to a gradual increase in daily production between May and July during a meeting last week. The cartel agreed to increase output by 350,000 barrels a day in May, add the same volume again in June and then move to an increase of 450,000 barrels a day in July.
The decision comes as nations roll out vaccines for the coronavirus pandemic, and gain clarity on a return to re-opening businesses and travel. The return of consumption will be monitored closely by OPEC, after the pandemic led to a crash in oil prices roughly one year ago.
The OPEC move shows that exporters are willing to shrug off pain for themselves, even as they recover from the pandemic. Oil prices slipped about 4 percent on last week’s decision, as the cartel decided against holding cuts longer and allow prices to continue rising.
That may come, in part, as producing nations seek to slow or avoid losing customers amid a global push towards sustainability, which includes shifting to electric vehicles.
Electric vehicles don’t emit carbon and can be driven by renewable energy, although natural gas and coal remain the main sources of global electricity.
Petroleum-fueled vehicles aren’t totally at a loss with regards to sustainability. Stricter emissions standards or increased miles-per-gallon efficiency could do much in practical terms.
That said, customer choice – which mostly depends on the price of fuel – will play a major role in the pace of the so-called energy transition. And OPEC is in the driver’s seat when it comes to the price of fuel.
While global prices pulled back, the OPEC move showed confidence that consumption will steadily increase. And prices might again follow. Exporter nations need cash, too.
Saudi Arabia’s Aramco increased its individual prices for oil shipments in its primary market of Asia for next month by USD 0.40 per barrel and cut those for European and U.S. customers by USD 0.20 and USD 0.10 per barrel.
The move angered buyers in Asia but pointed to Riyadh’s confidence in the post-pandemic economic recovery.
Saudi Energy Minister Prince Abdulaziz bin Salman announced during the meeting that OPEC+ still needed to be cautious until the economic recovery worldwide is complete.
India, which has been hit by the soaring oil prices, has urged producers to ease output cuts and help economic recovery. India imports around 80 percent of the crude oil it consumes. Of this, some 60 percent comes from Middle Eastern producers, such as Saudi Arabia.
OPEC appears to be listening with half an ear. It is ready to act to stave off competition, which most immediately comes from non-OPEC shale production in the USA.
It may be listening with both ears as the energy transition rolls out across the globe.
The past year has given the cartel plenty to think about, from oil major transition strategies to electric and renewables, increased ESG emphasis, to the eye-popping share price performance of electric vehicle manufacturers. Competing sources are gaining momentum. Prices in the post-pandemic return to consumption will very much determine the pace of things.