Is the Brent crude glut coming to an end?
FT's deputy commodities editor David Sheppard explains the recent rise in Brent crude price, Opec members' compliance on production cuts and the effect of renewables on prices.
Produced by Filip Fortuna and Xhulio Ismalaj. Edited by Xhulio Ismalaj.
The biggest force driving the price higher in recent weeks has been sustained signs that markets are in fact tightening. Demand has been stronger, partly as a result of seasonal factors over the summer. People drive more in North America, for example, going on long road trips or vacations.
Also we see in Middle East, a lot more oil, especially crude oil, in fact, is directly burned in power plants in many of the biggest Middle Eastern countries such as Saudi Arabia to help meet much stronger electricity demand, which is driven by the need for air conditioning. So that's how the real physical underlying cited that.
What we've also seen at the same time is that OPEC's efforts to cut back on supplies, as they have been since January the beginning of this year, alongside allies like Russia, is starting to show some effect. We've seen in the US, for example, that stockpiles of crude oil in particular have fallen sharply over the summer weeks and months.
As a result, you're starting to see, OK, maybe after all, some of these cuts are actually starting to work. And we're starting to see inventory levels come down closer towards-- though there's still a long way away-- from the five year average level which OPEC is targeting.
At the same time, you're being helped, it's a little bit cute that they're going for this five year average, because that's trending upwards over time. Because we've seen stock levels so high over the last three years. Overall, essentially, we were in a seasonal period of good demand, but at the same time, supplies have been tightening at least on the OPEC side where they've cut back.
Well, compliance could be better, certainly. Overall the OPEC group as a whole, their compliance has been close to 100% for much of this year, but that's largely because Saudi Arabia has cut output further than they had to-- at least until recent months.
So by then reducing output more, it essentially covered up for what some of the other members weren't doing. They've also been helped out by Venezuela, for example, her output seems to be in decline, not because of any great compliance on their part, just because of the problems with their economy and with their oil industry. And also Angola, where they had a problems with their economy, but also with trying to do field maintenance at certain time.
So could they do more? Absolutely. They could immediately announce stronger cuts, or Saudi Arabia could lead from the front and say, look, we're going to take another million barrels a day off this market.
Will they do it? At the moment, the mood music coming out of OPEC-- all the signals they are sending, suggest perhaps not. Saudi Arabia's own production has stabilised or even risen slightly, partly to meet higher demand in their own countries during the summer months that we discussed earlier. But also it seems that they're not quite prepared just to remove a huge chunk of oil from the market, where they might be giving up market share.
Renewables is an interesting one. Certainly the price of renewables has come down markedly. Things like solar-- where you've got mass production of solar panels in China. You've certainly seen the price come down a great, great deal.
However, while we talk about the rise of electric cars and so on, especially Tesla is the one that grabs most of the headlines here, you're seeing large orders. It's still a very small percentage of the overall global motor vehicle fleet.
Now, you have countries like France and the UK talking about moving entirely away from petrol and diesel cars by 2040 under the law. OK fine, so you get an even bigger use of electric vehicle, see, which should displace oil demand, you'd say.
One problem with that argument and why not everyone buys the oil demand is going to peak as a result of renewables or electric cars or whatever the sort of disruptive technologies might be, is that motor vehicle-- or especially passenger vehicle-- car use for oil demand-- only makes up about 25% of oil demand.
You have jet fuel, you have freight, you have petrochemicals, you have other reasons that's why companies like ExxonMobil and the International Energy Agency believe that we're going to see oil demand continue to grow, especially as vast parts of the world, the vast parts of the global population, come into driving, come into consumption, but it requires more plastics, more petrochemicals, more freights, more logistics, et cetera.
So it's a tricky one. Certainly, it's not a niche view anymore to say that oil demand could peak because of these things though. [INAUDIBLE] Shell for example, is preparing for the fact the oil demand will peak. So there's a real split in the market between these views, but certainly renewables is going to be part of that mix. And it's going to be a growing part.