Riding on the Oil Wave


Economist Artem Tuzov discusses whether the global hydrocarbons market is going to face a supply deficit and how it is going to affect the prices.

The recent International Energy Agency expert report states that the energy market will face supply shortages. This forecast is based on the assumption that OPEC+ members will not reach a consensus in the near future. This means that the organization will stick to the current limits on oil production, which causes its deficit due to the growing economy and the increasing demand for hydrocarbons in the market. The supply deficit could cause a drastic increase in oil prices, unprofitable for both producers and consumers.

Growing inflation levels in the world also contribute to the increase in oil prices. Amid the pandemic, oil producers have to account for soaring production costs and other expenses while protecting their interests at the expense of their consumers.

This dynamic seems plausible, yet one has to look at alternative scenarios. The experts assert that all OPEC+ members except the United Arab Emirates had agreed to the terms of the suggested deal, specifically on increasing production starting from August of this year. Although the U.A.E. did not object to the general terms, it advocated for increasing quotas for itself in particular.

Saudi Arabia rejected the idea of applying special individual conditions concerning oil production levels within the OPEC+ framework. These obstacles are manageable, and the U.A.E. might change its position to growing energy prices. This situation is beneficial for all of the OPEC+ members. According to the IEA report, increasing production by 400,000 barrels per day, which the countries had agreed upon earlier, is not going to cover the increasing oil demand. This will lead to its deficit and higher prices, even if the OPEC+ states eventually reach an agreement.

It would be more beneficial for the OPEC+ members to get a fix on this deficit since it causes oil prices to rise and agree on increasing production than to leave everything as it currently is. The U.A.E. has not taken any drastic decisions to destabilize prices. It has neither announced that it could possibly leave OPEC+, nor that it would not respect current arrangements.

Based on the IEA report, one might assume that by the next round of OPEC+ talks, oil prices will reach the $80 per barrel mark, which would create a more cooperative atmosphere during the talks. If the IEA forecast holds true under production increase, one might expect that the OPEC+ states could discuss increasing production by 600,000 barrels per day during the next round of talks. In that case, the U.A.E. will be satisfied and the countries will reach an agreement relatively quickly.

However, the IEA forecast that the demand is going to rise is based on the assumption the cases of COVID-19 will steadily go down and the world economy will grow. Yet, the experts’ assumptions about COVID-19 have been wrong before on multiple occasions. Waves of COVID-19 outbreaks are uneven, and an increase in demand in one country can coincide with falling demand in another.

The three-month-long cycles of growing and falling levels of COVID-19 cases in different countries constrain the recovery of the world economy. New COVID-19 variants undermine the immune system of those who have been sick or vaccinated. The negative scenario of the COVID-19 pandemic development might lead to a decrease in world oil demand. In that case, the current solution by OPEC+ to increase production by 400,000 barrels per day would be the best possible option.

Russia has benefited from growing oil prices, and it supports the current OPEC+ deal. Thus, it is unlikely that it is going to push other oil producers to make decisions fast. The negative scenario would be if prices fall due to the new wave of coronavirus or there a new supplier will enter the market, which the OPEC+ countries cannot control. Such an increase in supply is possible if the United States increases its shale oil production. However, currently, the U.S. shale oil producers face financial problems due to the last year’s hedging losses and their inability to rapidly increase production levels.

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About Iana Shchetinskaia 57 Articles
Iana Shchetinskaia studies History with a focus on U.S.-Russian relations. She teaches at a university and a language school in Moscow, Russia. She holds a Master of International Studies degree from North Carolina State University where she studied on a Fulbright scholarship. She is passionate about promoting mutual understanding among countries and communities and considers it a privilege to be a part of WatchingAmerica.

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