Oil prices: Opec+ will open taps before key ratio is reached

Oil prices: Before the key ratio is reached, Opec will open the taps.

Climate campaigners have been giving hydrocarbons a kicking for years. Lately, oil and natural gas have been demanding a lot more respect. Brent spot prices touched $80 per barrel this week.

Will oil soar further or is it already peaking? The answer depends on whether financial ratios or Opec+ politics dominate your thinking. The cartel meets again from October 4. It has good reason to restrain the rally.

Oil bulls get excited when inventories decline and world economic growth moves into overdrive. Global stocks of crude and all its products — on land, sea and in transit — have fallen all year. Supplies have dropped to 2018 levels. Meanwhile demand, according to the International Energy Agency, has jumped 14 per cent year on year to 94.5m barrels per day through June.

Oil strategists seek a “demand destruction” threshold at which the price of the black stuff should stabilise. One way to do this is to express global spending on oil as a percentage of world gross domestic product. This figure sends a strong warning of a price peak at 5 per cent or above. Today Lex puts the number at just 3 per cent. Unadjusted for inflation, a price of over $130 per barrel is needed to curtail demand.

That seems like an even crazier target if you consider how much capital has been flowing into clean energy projects. The US and China, the two largest consumers of oil, both have big investment plans for renewables.

Twice weekly newsletter

Energy is the world’s indispensable business and Energy Source is its newsletter. Every Tuesday and Thursday, direct to your inbox, Energy Source brings you essential news, forward-thinking analysis and insider intelligence. Sign up here.

The higher that oil prices rise, the more justifiable it becomes to invest in sustainable energy. Paradoxically, high prices are partly the result of cuts to exploration budgets after investors pulled their money. Globally, crude producers appear to have cut back capital spending by about half over the past decade, thinks Rystad Energy.

That leaves the Opec+ grouping of oil-producing countries tiptoeing along a narrow ridge in its efforts to regulate prices. It has stated a desire to keep crude at $70-$80 per barrel. Oil analysts expect the cartel to agree to add another 400,000 barrels of supply from next week.

All oil producers face an existential threat. That means there is a real possibility that Opec+ will increase production further, if not next week then before the end of this year. That thought alone should cool the ardour of oil bulls.

If you are a subscriber and would like to receive alerts when Lex articles are published, just click the button “Add to myFT”, which appears at the top of this page above the headline.

Your email address will not be published. Required fields are marked *