High oil prices to stay as OPEC+ signals comfort with rising price trend

Oil production is rising only slightly faster than consumption, which has caused a price surge to be sustained. Rejecting calls from consuming countries for faster output increases, OPEC+ has warned about continuing risks posed by the coronavirus pandemic and a forecast rise in oil inventories next year. Star Tribune reports that OPEC+ is raising its production target by 400,000 barrels per day (bpd) each month, but it has pushed back against calls to increase output faster in response to the surge in prices.

"We don't take things for granted, we still have COVID," Saudi Arabia's energy minister and de facto leader of the OPEC+ group of major oil exporters said in a TV interview last week. "We are not yet out of the woods," he told Bloomberg. "We need to be careful. The crisis is contained but is not necessarily over."

The minister noted global travel was still subdued and warned about the potential for a "huge uplift" in oil inventories next year to justify his caution. Restrictive output policies from both OPEC+ and U.S. shale producers have kept global production consistently below consumption since June 2020.

The result has been a sharp drawdown in global inventories, which has lifted prices to some of their highest levels in real terms since 2014. But how justified are fears about another wave of coronavirus disrupting the recovery in oil consumption or a sudden build in inventories? Or is the group allowing prices to rise to maximize short-term revenues?

Global liquid fuels consumption was down by around 2.1 million bpd in September compared with the same month in 2019, as a result of the lingering impact of the pandemic and recession. Global production was down by 2.8 million bpd over the same period, according to the U.S. Energy Information Administration.

Organization for Economic Cooperation and Development commercial petroleum inventories jumped by 335 million barrels during the first wave of the pandemic and lockdowns between February and July 2020. But commercial inventories have since shrunk by 425 million barrels as a result of the strong rebound in the economy and restrictions on output.

By September, OECD commercial inventories were 145 million barrels, or 5% below the level two years ago, before the pandemic. Global consumption is forecast to recover to pre-pandemic levels by the middle of 2022, with production increasing slightly faster. The result is expected to be a modest increase in inventories, but from a below-average starting point, which will still leave them below the pre-pandemic five-year average by the end of 2022.