Energy shortages and price spikes suggest the world needs more oil to meet global needs in the near term. Just how much more – and how quickly – remains a moving target.


With Lower 48 producers hesitant to boost output in the pandemic’s wake, the Organization of the Petroleum Exporting Countries (OPEC) and its allies, aka OPEC-plus, are in the driver’s seat. They could either ramp up output to balance the market this year or continue a measured approach to keep upward pressure on prices to compensate for coronavirus-induced losses last year. The cartel’s leader, Saudi Arabia, saw its oil export revenue in 2020 nearly cut in half from the previous year, according to OPEC data.

It creates a balancing act between profits now and possible economic disruption if prices surge too high.

Brent crude prices, the international benchmark, were trading above $81/bbl in intraday trading on Wednesday. Brent prices are up about 60% this year.

Mexico’s oil export basket, which is updated daily, stood at $75.02.

The oil price rally has developed alongside a global economic recovery from the pandemic that elevated demand for travel fuels. It has been amplified by shortages of natural gas and coal needed for power and winter heating across swaths of Europe, Asia and South America.

In Mexico, the tight market conditions and recent memory of Winter Storm Uri have natural gas users on edge heading into winter, according to Gadex consultancy founder and NGI contributor Eduardo Prud’homme.

“They fear another shortage situation combined with exorbitant bills for their natural gas consumption needs,” Prud’homme said in his latest column.

Capping high energy prices also is central to President Andrés Manuel López Obrador’s argument for a massive regulatory overhaul that he is seeking to push through the national congress.

The intensifying global energy crisis has galvanized calls for gas-fired power plants to switch to oil, particularly in heavily populated Asia, where clean energy regulations lag other parts of the world.

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With oil stocks still well below pre-pandemic levels, however, current supplies may not cover the added demand. “We anticipate a tight global balance through year-end given current lower inventories,” ClearView Energy Partners LLC.

Saudi Arabian Oil Co., aka Aramco, this week said the potential natural gas crisis had already boosted oil demand by 500,000 b/d, or 100,000 b/d more than the pace of OPEC-plus increases. The cartel on Monday approved another 400,000 b/d production increase for next month, continuing a plan launched in August.

“OPEC-plus projections had forecast a supply deficit through 2021, with the 400,000 b/d monthly supply injection breaking the supply deficit by the end of the year,” said Mizuho Securities USA LLC’s Robert Yawger, director of energy futures. However, “500,000 b/d of fuel switching would imply that the supply deficit could linger” into 2022.

Barclays oil strategist Amarpreet Singh said the market reaction this week “shows how tight the market is, reinforcing our view of asymmetric price action with risks skewed to the upside at these inventory levels.”

Does Inflation Loom?

Of course, rising oil prices get passed on to business owners and consumers. This is stirring fears that inflation could derail the economic recovery and, eventually, drag down oil prices.

Raymond James & Associates Inc.’s Chief Investment Officer Larry Adam said crude’s recent “sharp price rebound may shift the narrative” and convince OPEC to take more aggressive production action. He said inflation concerns are already elevated from pressures caused by supply chain disruptions. Lofty energy costs could force consumers and businesses to hunker down and delay investments needed to keep the economy humming.

The fact that large U.S. onshore producers are committed to modest output levels through 2021, rather than taking advantage of higher prices, adds to the pressure on OPEC-plus. U.S. output remains more than 1.0 million b/d below the 2020 peak reached in March 2020 before the pandemic, according to Energy Information Administration data.

OPEC-plus officials this week said their projections include expectations for strong economic growth deep into 2022 – robust enough to support high oil prices. This helps to explain why they stuck with their plan to gradually align supply with expected demand.

However, analysts expect that, as long as production growth is modest, prices could keep climbing. Goldman Sachs Group analysts recently raised their year-end Brent price forecast by $10 to $90, noting production increases continue to lag demand.

Rystad Energy analysts view conditions similarly.

“The brewing energy crunch has fanned commodity prices across the board and made both oil and gas quite expensive for customers,” said Rystad analyst Louise Dickson. Because “demand signals are increasingly bullish, a talk of potentially bringing back more barrels than planned is within reason.”

Mindful of balances and the specter of runaway inflation, OPEC-plus “will definitely be monitoring how the high prices affect sales, and also how the market balances evolve through the end of the year,” Dickson added. “How fast Covid recovery plays out, how cold winter is, and how financial and money markets develop in the coming months can all tip the oil price scale… We expect more action from OPEC-plus at the December meeting.”

Should the scale get tipped even more dramatically to the bullish side, however, OPEC and its partners may have to raise output sooner to quell inflation.

“As oil gets pricier by the day,” Dickson said, “buyers need to reassess how they react to such a sustained and upward cycle that hasn’t been witnessed since the so-called commodity ‘super-cycle’ days of 2008 and 2011.”

With additional reporting by Andrew Baker