Oil: The Perfect Storm Keeps Brewing

October 20, 2021

By Orbex

Last night, workers at a US refinery in Texas voted against resuming work in the latest round of acrimonious negotiations between the union and Exxon Mobile.

The company plans to transform the location into the largest refiner on the continent. Production continued at the facility as the company maintained its lock-out in the middle of the dispute.

It was just one more drop in the barrel of issues pushing crude and its derivatives higher. The Biden Administration continues to say they are engaging with OPEC+ “diplomatically” to increase production. However, there’s no trend in the data.

Where’s the oil?

OPEC reported that production cut compliance was at 115%. Some analysts argued that producers were “unable” to increase production, while others said they were “unwilling” to do so.

The latest auction of natural gas supply to Europe from Russia showed that there was no substantial increase in the supply, despite pledges from President Putin to help Europe. German Greens, and probable future members of the government, accused Russia of “blackmailing” Europe.


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Reports showed that all of the increased production from Gazprom went to internal demand, leaving export demand unfulfilled. Russian exports of fossil fuels dropped by 18% in the first two weeks of the month. That’s the lowest figure since at least 2014.

Geopolitics or georeality?

Russia insists that the lower supply has nothing to do with the pending Nord Stream 2 pipeline. In fact, the pipeline was filled with technical gas on Monday to test structural integrity. Europe insists that delays in certification have nothing to do with pending frictions with Russia.

Meanwhile, China shut down more steel plants and reduced coal consumption as part of a drive to cut carbon emissions. A shift to natural gas would help with the blackouts China is facing. Specifically, it would allow for compliance with directives and constant electricity generation.

Nonetheless, there hasn’t been any disclosure on whether China is increasing its imports of natural gas from Russia.

Last night, China once again looked to release more strategic reserves to address the increased demand for non-coal fossil fuels. Oil prices have been weaker on the back of the news, but it is still a temporary fix if production doesn’t increase.

It’s all about tradeoffs

Yesterday, the UN said that fossil fuel producers’ plans to decarbonize “far exceed” climate targets. With major companies across the world pledging to go carbon neutral, there is an expectation of diminished demand in the future.

Oil exploration has not recovered. For example, Baker Hughes has a rig count of 32% below the 2019 levels. In fact, they have seen a decline for the last three weeks despite some of the highest crude prices in years.

One explanation could be that producers see the current spike in prices as transitory. And it’s not worth making the initial investment to start drilling if prices will fall soon.

On the other hand, it might be that producers simply want to keep prices high in a world moving away from crude, as part of a strategy to maximize assets.

The unexpected weather conditions in Europe might have sparked the current rise in oil prices, but that appears to have opened a gap for a lot of competing interests to exercise their leverage.


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