Humanity is declaring war on global warming. This impression has recently been confirmed again by the global climate strike and at the special UN Climate Action Summit in New York. Fossil fuels play a central role in this Herculean task, as they are considered to be the main sources of harmful greenhouse gases. Despite all the efforts to curb consumption and to promote renewable sources of energy such as sun, wind and water, there is still no way around oil. Some 100 million barrels of the black gold are consumed worldwide every day, with demand increasing by more than 7% in the past five years alone. “There is no peak in sight,” wrote the International Energy Agency (IEA) in a market forecast published in March 2019. With their insatiable appetite for energy, the two emerging markets of China and India are the main reason why there is no foreseeable peak in oil demand.
Contrary to what had long been feared, this development has not yet led to a shortage. Global oil production has instead exceeded demand every quarter since early 2018, according to figures released by the U.S. Energy Information Administration (EIA). In its forecast until the end of 2020, the agency assumes that the surpluses will continue (see graph I). The USA is primarily responsible for the comfortable supply situation. With the massive expansion of shale gas production, America has accelerated oil production in recent years. The EIA expects an average daily output of more than 13 million barrels for the current year, which means that US production will have more than doubled within eight years (see graph II). According to the IEA, this development heralds the dawn of a new era. The agency expects the USA to be a net exporter of oil in 2021. America may have depended on imports for 75 years, but it will soon be on a par with the oil-producing nations of Russia and Saudi Arabia. View more information on investment solutions on the topic “Oil market: Volatility in the market for black gold”.
This duo leads the so-called OPEC+ alliance. The Organization of Petroleum Exporting Countries works with Russia and other oil-producing nations to counter the global oversupply. By cutting production and restricting the supply, the alliance has managed to support the price of oil. In addition to demand and production volumes, the general economic situation and geopolitical climate play vital roles in the highs and lows of the black gold. Commodity markets have for months been glued to news of developments in the Middle East. Attacks on oil tankers and verbal skirmishes between the USA and Iran caused disquiet. The high levels of supply and the clouds on the economic horizon initially masked the risk of supply shortages. This changed abruptly at the beginning of the month when drone attacks on the Saudi oil industry triggered a hike in prices, the like of which had not been seen for a long time. The strikes resulted in the loss of a daily production volume of 5.7 million barrels, equivalent to around 5% of global output and causing an increase of almost one-fifth in the price of a barrel of North Sea Brent Crude.
The Kingdom took swift action to calm the markets, claiming that the losses should be absorbed by the end of September and pre-strike production levels restored. Nevertheless, the incident shows how fragile the situation in the region is and therefore also highlights the vagaries of the global interaction of oil supply and demand. At the same time, it shone a light on the vitality of this energy source for a number of sectors. Take aviation, for example, where the shares of airlines, which are heavily dependent on kerosene prices, came under particularly strong pressure on the first day of trading after the attacks. Meanwhile, the shares of the big multinational oil companies were in demand. The STOXX Europe 600 Oil & Gas index gained almost 3% on 16 September against a weak stock market trend. The logical conclusion is that investors do not necessarily have to position themselves on the commodity futures market in order to pursue a certain oil price scenario. The stocks of the sectors linked to the energy source offer an alternative.
View more information on investment solutions on the topic “Oil market: Volatility in the market for black gold”.