Lower oil prices are only temporary
Oil prices fell sharply last week, by more than 11 percent. But the fall was halted yesterday. Yesterday, the prices rose again by about 5.5 percent. The reason for the turnaround was probably the blockade in the Suez Canal by the container ship EverGiven of the Taiwanese shipping company Evergreen. The mega-ship is stuck in the canal, lies crosswise and no mouse can pass through. The Suez Canal is one of the busiest and most important shipping lanes in the world, especially for the oil industry that transports about 10 percent of the world’s ‘sea’ oil through the canal. According to research firm Vortexa, there are currently at least 10 oil tankers carrying some 13 million barrels of crude oil queuing behind the blockade, waiting to move on. In the meantime, the usual saviour in distress.
Another explanation for yesterday’s higher oil prices, which are already dropping by more than 1 percent today, could be the better than expected purchasing managers’ indices. Especially the economy of the eurozone turned out better than expected. Here the economy turned from a contraction to growth in March, according to the figures of Markit Economics. The composite purchasing managers index for the eurozone rose from 48.8 in February to 52.2 in March. This is the highest reading in eight months and the German industry in particular contributed to this. European industry showed an acceleration in growth and the services sector contracted less than expected. Despite the new lockdown measures in the eurozone, European manufacturers continued to benefit from the global recovery. According to Markit Economics, the US economy also continued to grow, albeit slightly less than last month. The composite purchasing managers index for the United States fell from 59.5 in February to 59.1 in March.
It was precisely these new lockdown measures that caused the sharp rise in oil prices in recent months to stall. With vaccination programmes underway worldwide, the opening up of the global economy seemed only a matter of time. With this in prospect, oil prices soared. But thanks to the AstraZeneca vaccine ‘hassle’, the disappointing speed of vaccination and the growing numbers of new infections, the gloom about the economy starting up again increased. As a result, traders and speculators took profits on their oil positions. The strengthening dollar also contributed to this. For the first time since January, the spot price of Brent oil fell below the price of oil that is to be delivered in the coming months. We call this contango. A higher oil price in the future causes traders to store oil in order to be able to sell it at a higher price in the future. We saw this the day before yesterday in the reporting of weekly oil inventories. The American Petroleum Institute reported an increase of 2.9 million barrels of crude oil while, according to Reuters, analysts were expecting a decrease of 300,000 barrels.
But even without the Suez Canal blockade, the drop in oil prices would have been only temporary. There are two reasons for this. Firstly, according to the report of the renowned International Energy Agency (IEA), which contains the outlook for this year and beyond, the demand for oil will return to its pre-corona crisis level as early as 2022. This concerns a daily demand of about 100 million barrels of oil. Subsequently, according to the IEA, this will further increase to a demand of 104 million barrels per day in 2026. Secondly, the influx of American shale oil is not as high as expected. The oil sector in the southern United States is still recovering from the frost damage of a few weeks ago. Moreover, because of the low oil price in recent years, little maintenance has been done on those oil installations. Analysts from Barclays, JPMorgan, and Goldman Sachs, therefore, stand by their previously issued forecasts. Barclays expects a price for Brent oil of 66 dollars a barrel in 2021 and 71 dollars a barrel in 2022. JPMorgan predicts a price of $74 by 2022 and Goldman Sachs analysts even see a price of $80 per barrel ‘sometime in the next few months’. They, therefore, call the falling oil prices a ‘buying opportunity. By the way, did you know that Royal Dutch Shell breaks even at around 50 dollars a barrel? And that every 10 dollars more per barrel adds about 6 billion dollars to Shell’s operational cash flow?