Oil’s Wild November Ride
2021 had seen an impressive recovery for oil prices. The Omicron coronavirus variant and inflation fears put the brakes on that rebound — for how long?
2020 was a disastrous year for the global petroleum market. Globally, oil demand dropped by nine percent and producer prices declined by 34 percent in March 2020 as the coronavirus epidemic began to unfold. The 2021 turnaround in the fortunes of oil producers, from OPEC to American shale oil producers, has been impressive. OPEC+ (member nations plus Russia) have maintained discipline this year. No small feat given the (a) nasty price war that erupted between Saudi Arabia and Russia just two months before the coronavirus epidemic caused demand to collapse last year and (b) internal OPEC disputes over production cuts/market share in spring 2021.
In July, prices returned to about $75 per barrel and OPEC+ had agreed to slowly rollback the production cuts from 2020. So began an impressive run of increasing prices — and stability. OPEC+ would eventually agree to raise oil production during the fall (reversing previous production cuts) by 400,000 barrels/day through November and December.
American consumers saw gasoline prices rise throughout the summer and early fall. But in petroleum production, a month is a lifetime. November delivered a double shock. Inflation worries, particularly the price of gasoline and home heating oil cost projections, caused concern and led the Biden administration to announce the release of 50 million barrels of oil from the nation’s strategic reserve supply. That measure will provide only modest and temporary relief. More important, demand and petroleum prices fell as several European nations saw increasing coronavirus infections and widespread lockdown measures including in Austria and Germany. U.S. consumer inflation rose 0.9% in October alone with fuel costs representing a large portion of that jump.
And then came the November 26 announcement by the World Health Organization (WHO) that the newly identified omicron coronavirus variant was a variant of concern.
The oil market fell further on expectations that demand and economic activity would retreat. West Texas Intermediate (WTI) futures, the benchmark US petroleum product reached $84/barrel on November 9. By December 1, WTI futures were trading much lower at $65.50/barrel, a 22 percent decline in three weeks.
But early indications that the omicron variant may not be as large a threat to vaccine efficacy as first feared led to a modest but rapid rebound in oil prices by Dec. 7, up to about $71.50/barrel. Prepare for a rollercoaster ride in oil prices this winter, generally going up as temperatures drop and more robust global economic activity returns in early 2022.
A few key lessons from November’s rollercoaster ride. First, OPEC+ nations still retain enormous power over the price of oil globally even as U.S. production remains at impressive levels. U.S. production is about 11.4 million barrels per day. And OPEC+ production was slightly below expectations for November, a sign that extra capacity is a genuine production issue for OPEC and a valuable tool for the organization as it seeks optimal prices for petroleum products. At the beginning of November President Biden had asked OPEC nations to use that extra capacity to help push prices down.
OPEC’s influence and power on markets will be further enhanced by the production discipline which the organization has demonstrated consistently since June. Previously, OPEC members were notorious for often not adhering to agreed production quotas.
Second, inflation may be a consistent threat to the economy into 2022. For the consumer, gasoline prices will only slightly decrease in December and January even if economic activity slows. OPEC+ producers are eager for prices to remain stable and there is little interest in price discounts or price wars. American shale oil producers are also being more cautious about expanding domestic production given the loses sustained throughout 2020.
The release of oil from the U.S. strategic reserve will continue but will only have a minor affect on prices in the medium term. Robust economic activity returning in early 2022 will signal whether high oil prices are here to stay in the medium term, and consumer inflation along with it.
Black gold, indeed.
