Analysis: Oil's journey from worthless in the pandemic to $100 a barrel

Crestwood Equity Partners LP

24/02/2022 08:04

By David Gaffen
    Feb 24 (Reuters) - In July 2020, just a few months after the
COVID-19 pandemic started to spiral out of control, Shell CEO
Ben van Beurden declared world oil demand may have passed its
peak - all but condemning his company's core business to
eventual obscurity. 
    "Demand will take a long time to recover if it recovers at
all," he told reporters after the Anglo-Dutch energy company
reported a sharp drop in second-quarter profit.
    Van Beurden wasn't alone in his gloomy view. Like much else
during the pandemic, what was happening in fuel markets was
unprecedented. Demand had fallen so sharply as people stopped
travelling, the oil industry simply couldn't cut production fast
enough to match it.
    Worse, the fall in demand came as Russia and Saudi Arabia -
the two most powerful members of the OPEC+ group - were locked
in a supply war that flooded markets.
    There was so much oil there was nowhere to put it, and in
mid-April 2020 the price of a barrel of West Texas crude went
below $0 as sellers had to pay get rid of it.
    But less than two years later, the predictions of Van
Beurden and others about oil's demise look premature.  
    Benchmark Brent crude futures hit $100 a barrel on Wednesday
for the first time since 2014 as Russian President Vladimir
Putin ordered military operations in Ukraine. The potential for
conflict to interrupt supply added more pace to a rally
underpinned by a recovery in demand that has been faster than
oil producers can match.  urn:newsml:reuters.com:*:nL1N2UZ09Z
    Worldwide oil consumption last year outstripped supply by
about 2.1 million bpd, according to the International Energy
Agency, and will surpass 2019-levels this year. 
    Oil suppliers had to drain inventories to meet demand, and
consumer nations are pleading for companies like Shell to drill
more.  urn:newsml:reuters.com:*:nL8N2UP2RA  urn:newsml:reuters.com:*:nL1N2UQ1JL
    
    BOOM AND BUST
    Such a cycle has replayed often throughout the history of
oil. 
    "If you go back to the days of whale oil, oil has been a
story of boom and bust," said Phil Flynn, senior analyst at
Price Futures Group in Chicago. "It’s a peak-to-valley cycle and
usually when you hit the valley, get ready because the peak
isn’t that far ahead."
    The trough in oil prices in early 2020 triggered political
moves that might have otherwise been unimaginable.
    Donald Trump, the U.S. president at the time, became so
concerned about the potential collapse of domestic oil drillers
that he delivered Saudi Crown Prince Mohammed bin Salman an
ultimatum in an April phone call: cut production or risk the
withdrawal of U.S. troops from the kingdom.
    Investor and governmental pressure for oil producers to cut
emissions was also on the rise.
    In mid-May 2021, the International Energy Agency said there
should be no new funding of major oil-and-gas projects if world
governments hoped to prevent the worst effects of global
warming.  urn:newsml:reuters.com:*:nL2N2N50GJ
    It was an about-face for an organisation long seen as a
major fossil fuel cheerleader. 
    
    POLICY POWER
    The politics of the transition have made European oil majors
reluctant to invest in increasing production, so their typical
reaction to higher prices - to pump more - has been slower than
it might otherwise have been.
    Several OPEC+ members simply didn't have the cash to
maintain oilfields during the pandemic as their economies
crashed, and now cannot increase output until costly and
time-consuming work is completed.
    Those with spare capacity such as Saudi Arabia and the
United Arab Emirates are reluctant to overstep their OPEC+
supply share agreements.
    Even the U.S. shale industry  - the world's most critical
swing producer from 2009 through 2014 - has been slow to restore
output amid pressure from investors to increase their financial
returns rather than spending.    
    All of this sowed the seeds for the current boom.
    The Biden Administration, which wants to fight climate
change but also protect consumers from high pump prices, is now
encouraging drillers to boost activity and calling for OPEC+ to
produce more oil. So is the IEA.
    That could be a struggle, according to Scott Sheffield, CEO
of U.S. shale producer Pioneer Natural Resources. He told
investors last week that OPEC+ does not have enough spare
capacity to handle rising world demand, and that his own company
would limit production growth to between zero and 5%. 
    RBC Capital's Mike Tran said it will be high prices, not new
supply, that ultimately balances the market. "It simply does not
get more bullish than that," he wrote in a note this month.
    But others think the supply will come eventually. After all,
a boom always comes before a bust.
    "We think $100 crude brings in all the wrong things - too
much supply, too fast," said Bob Phillips, CEO of Crestwood
Equity, a midstream operator based in Houston. "We don’t think
it’s sustainable."

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Brent vs WTI crude oil prices    https://tmsnrt.rs/3BKudL5
Brent crude oil topped $100/barrel for the first time since Sep
2014 on Russia-Ukraine tensions    https://tmsnrt.rs/3HegnBO
Global liquid fuel supply & demand balance    https://tmsnrt.rs/3p7zbMI
U.S. oil production has not recovered to pre-pandemic levels as
drillers restrain spending    https://tmsnrt.rs/3LZTJAv
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 (Additional reporting by Sabrina Valle, Ron Bousso and Liz
Hampton
Editing by Richard Valdmanis, Simon Webb and Gerry Doyle)
 ((richard.valdmanis@thomsonreuters.com; +1 617 312 6022;
Reuters Messaging:
richard.valdmanis.thomsonreuters.com@reuters.net))