4 ‘O’s to Watch this Week: Oil price, OPEC+, Olympics, and Oil Consumption – Rystad Energy
Oil price
The oil price this week will get its biggest and most impactful guidance from the 2 February OPEC+ meeting, where the group will have to signal whether it is willing or interested in dipping further into spare capacity to quell super-high oil prices that have defended their stake above $90 per barrel Brent for the past 3 trading days. Structurally speaking, the price mostly reflects the supply shortages, not only from OPEC+ underperformance but from a calmer US shale growth trajectory and outages elsewhere.
OPEC+
The supply management bloc has pledged, and delivered, on restoring oil prices since its new deal in April 2020, but while OPEC+ has successfully brought the price up, it hasn’t taken any decisive action to bring it back down, as the month-to-month supply increases of 400,000 bpd are either too immaterial for the market to appreciate and more importantly, not being completely fulfilled by the group. The only short-term solution for balancing the supply-short oil market will therefore need to come from OPEC+, and steered by Saudi Arabia, the producer with the largest spare capacity. The group’s top producer could decide to add more “voluntary” barrels outside the framework of the agreement to ease oil prices, a similar, but mirrored action from January 2021 when it surprised the market with an additional 1 million bpd cut. In short,Saudi Arabia can quickly and easily drum up spare capacity if it decides it is beneficial.
Olympics
At the 2014 Olympics, Russia was eager to put geopolitics on hold as it hosted the winter Olympics, and just days after the closing ceremony, invaded Crimea, kicking off the Ukraine conflict and triggering energy and financial sanctions from the US.
Whether Russia decides to continue its military buildup around the Ukrainian borders in order to push the US to act as a protector while China is hosting the Olympics remains to be seen, but would certainly be a geopolitical distraction that would take attention away from the Games.
The winter Olympics this year in Beijing, are set to be a much quieter affair, with very few in attendance and potential downside to oil consumption as the China enacts regional lockdowns to accommodate the event. Travel for the Lunar New Year is more or less permitted, but could still come in short below pre-pandemic levels.
Oil consumption
This brings us to the oil consumption question, as lower gasoline, diesel, and jet consumption in China over the Olympics and Lunar new year could be an important signal for crude futures. A demand burst from China could lend support to already healthy refining margins, whereas a blip could soften the price floor for crude in Asian markets.
On the other side of the world, the US likely experienced a demand dip after last week’s winter storm in the US Northeast kept jets grounded and road traffic mostly halted.
Lastly, the more silent threat to oil demand comes from the central bank push to pivot towards more hawkish policy after two years of extraordinary pandemic spending. GDP growth constrained by tighter monetary policy paired with premium oil prices would eventually crimp consumption of refined oil products.
