Oil’s latest boost has longer-term thrust

Brent crude prices hit their highest level since in March on Nov. 24, rising above $47 a barrel

  
Image used for illustrative purpose. The sun is seen behind a crude oil pump jack in the Permian Basin in Loving County, Texas, U.S., November 22, 2019.

Image used for illustrative purpose. The sun is seen behind a crude oil pump jack in the Permian Basin in Loving County, Texas, U.S., November 22, 2019.

REUTERS/Angus Mordant

(The author is a Reuters Breakingviews columnist. The opinions expressed are his own.)

LONDON - Oil prices are escaping their tunnel vision. Since June, Brent has oscillated between $37 and $45 a barrel, as investors wrestled with a succession of Covid-19 lockdown snakes and potential vaccine ladders. There’s more than one reason to think that the latest jump to $48 a barrel, the highest level since March, may be a new floor.

That may sound prematurely rosy. After Brent sank below $20 a barrel in April, stores of crude oil as compiled by Morgan Stanley jumped to 7.8 billion barrels, far above normal levels, and are still sufficiently elevated to act as a brake on higher prices. Higher Brent could also encourage oil producers who form the so-called OPEC+ group to unwind output cuts intended to prop up prices. They are more likely to do so if U.S. shale drillers start pumping away, given the latter can more easily cover their costs at current prices.

Still, the International Energy Agency’s downbeat Nov. 12 assessment predicting no significant boost to demand until the second half of 2021 is starting to look prematurely glum. There are now four successful vaccine trials, which could allow a swifter return to normal life. That in turn could lead to a quicker recovery in global daily demand, which the IEA currently expects to be 97.1 million barrels next year, compared with 100 million barrels seen in 2019.

While the oil price may bounce around in the short term, there’s a second driver that should provide support in coming years, even offsetting the efforts of countries to wean themselves off fossil fuels. In 2019 capital investment by drillers globally was $530 billion, but according to consultancy Rystad Energy it will drop to $380 billion this year and potentially $300 billion in 2021, as Covid-battered drillers curb investment. And even if China and the United States embrace long-term net zero targets, daily oil demand could still be 101 million barrels in 2030, Bernstein reckons, in line with 2019 levels.

The potential price hike is not currently evident in longer-dated Brent futures: the contract for delivery in December 2024 is currently worth under $50 a barrel. That may soon change. It could also prompt a rethink at companies like Exxon Mobil XOM.N and Royal Dutch Shell RDSa.L , RDSa.AS , who have been slower than peers to detail a switch to renewable energy. They might now be tempted to ramp up their oil investments instead.

CONTEXT NEWS

- Brent crude prices hit their highest level since in March on Nov. 24, rising above $47 a barrel as the latest promising coronavirus vaccine raised demand recovery hopes and U.S. President-elect Joe Biden received the go-ahead to begin his transition.

- As of 0939 GMT on Nov. 25, Brent crude was up 1.2% at $48.45 a barrel, while U.S. West Texas Intermediate crude was up 0.7% at $45.20 a barrel.

- OPEC+, as the group of oil exporters and its allies such as Russia is known, is expected to roll over production cuts agreed in March into 2021 after a meeting over Nov. 30 to Dec. 1.

- BP shares rose 8.4% on Nov. 24 to 274.8 pence. Exxon Mobil, Total and BP all rose about 6% as of 1900 GMT; Chevron was up 4.9%.

(The author is a Reuters Breakingviews columnist. The opinions expressed are his own.)

(Editing by Neil Unmack and Karen Kwok) ((george.hay@thomsonreuters.com; Reuters Messaging: george.hay.thomsonreuters.com@reuters.net))

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