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Barrel thirst puts $100 in sight


(Bloomberg) — As lockdowns due to the Covid-19 pandemic engulfed the world in 2020, Bernard Looney, chief executive officer of BP Plc, made a startling admission: He thinks demand is in demand. Oil may never return to pre-pandemic highs. But recently, Looney has completely changed.

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After announcing ambitious emissions-cutting plans, BP, one of the world’s top crude oil producers, is now investing more money in fossil fuels. Oil consumption is headed for record levels this year, according to the International Energy Agency, which advises major economies. Supply – hit by Russia’s invasion of Ukraine, slowing US shale growth and lackluster investment in production – can’t keep up.

It’s all because of China: The world’s second-largest oil consumer is buying crude after reversing its strict Covid-19 policies. In the face of tight supply, increased demand caused everyone from Goldman Sachs Group Inc. to trading powerhouse Vitol Group are all predicting an increase to 100 USD/barrel by the end of this year.

“Demand from China is very strong,” Amin Nasser, CEO of Saudi Aramco — the world’s largest oil company — said in a March 1 interview in Riyadh.

The market will face shortages in the second half of the year — a scenario that will emerge ahead of this week’s meeting of industry leaders in Houston for S&P Global’s CERAWeek, analysts say. a major annual energy conference.

The impending crisis shows that even as the world embraces cleaner sources of energy, the thirst for oil will still be hard to quench. While the supply shortage benefits crude oil producers and their investors, it hurts consumers and complicates banks’ efforts to contain inflation. central goods.

Saad Rahim, chief economist at Trafigura Group, said on the sidelines of the International Energy Week conference in London last week: “In my view, maybe people are underestimating demand and overestimating it. US output.

In the face of the sudden reversal of Covid Zero — a policy requiring mass lockdowns, travel quarantines as well as testing and tracing — China’s economy is reviving, boosting oil demand. Manufacturing posted its biggest improvement in more than a decade last month, service activity is picking up and the housing market is stabilizing.

The reopening means China’s oil consumption is poised to hit a record this year. Daily demand will hit an all-time high of 16 million bpd after falling in 2022, according to the median estimate of 11 China-focused consultants surveyed by Bloomberg News earlier this year. .

It’s not just China. According to the IEA, India and other countries across the Asia-Pacific region are consuming more oil as borders reopen, helping to push global demand to a record 101.9 million bpd. days this year and is likely to plunge the market into a deficit in the second half of the year. Air traffic is recovering, boosting the use of jet fuel. And demand for crude oil in the US and Europe also rebounded.

Christopher Bake, a member of Vitol’s executive board, said at the International Energy Week conference, the resurgence of international tourism with the re-emergence of China will be one of the “demand engines driving demand.” “. “I think we’ll see that progress over the next few months.”

Supply does not match the increase in demand. Although Russia’s oil exports by sea remained steady last month, market watchers are looking for signs of disruption after the European Union and most of the Group of Seven countries banned imports. oil and fuel exports by sea after the invasion of Ukraine. Russian shipments are under threat as India, a top buyer, faces growing pressure from bankers to prove that their goods are in compliance with the $60-a-day price ceiling. barrel imposed by the G7.

Meanwhile, OPEC has not budged from the production targets it set in October. Saudi Arabia’s Energy Minister Prince Abdulaziz bin Salman said the targets would remain unchanged for a while. remainder of the year.

And the United States will not come to the rescue. Output from shale basins is growing at a slower rate as producers deplete key areas for drilling. According to research firm Enverus, US production fell at the start of the pandemic and is still about 800,000 barrels per day below the record 13.1 million hit in early 2020. about 560,000 barrels per day.

The deceleration comes even as Exxon Mobil Corp., Chevron Corp. and their peers pump more oil from the Permian Basin of West Texas and New Mexico. Chevron CEO Mike Wirth told Bloomberg Television on March 1 that global spare production capacity is constrained and that US shale supply growth is unlikely to make up the shortfall if demand increase later this year, making OPEC the world’s swing producer.

“As we enter the second half of the year, risks to the upside start to build up,” Wirth said.

However, potential headwinds to oil demand are lurking. Fears of a global recession are lingering as central banks tighten monetary policy in an attempt to tackle inflation. Although Natasha Kaneva, JPMorgan’s head of global commodity strategy and research, is optimistic about China’s crude consumption, she predicts the price increase could be “very slow”.

At the end of February, several Wall Street analysts downplayed their predictions for this year’s price hike. Morgan Stanley has cut its forecast for the second half of the year and downplayed its view that Brent crude will break through $100 a barrel, while Bank of America Corp. said it sees less upside risk due to stronger Russian oil flows. Brent, the global benchmark, was trading near $85 a barrel on Friday.

Even so, analysts see crude prices picking up in the second half of the year, with many predicting Brent prices to return to triple digits for the first time since August. Jeff Currie, Goldman’s head of commodities research, said in an interview with Bloomberg TV on March 1 that the reopening of China would reduce global spare production capacity, pushed prices up to $100/barrel in the fourth quarter due to reduced inventories and stable money supply.

“When China comes back, we will lose that spare capacity,” said Currie. “My confidence that we will see another bull run in the next 12-18 months is quite high.”

–With support from Alix Steel, Archie Hunter, Julia Fanzeres, Fahad Abuljadayel, Francine Lacqua, David Wethe and Kevin Crowley.

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