Monday saw oil-prices reach three-month highs as investors and traders reacted to a growing sense of optimism regarding the pending US-China trade talks. Throughout much of 2018, oil prices have tumbled, dropping 30 percent in the last quarter and left many producers in tricky situations.
When coupled with the fact that America is pursuing a policy of energy independence and expects to begin exporting energy in the coming years, many are worrying that oversupply will drive prices further down. In response, OPEC countries and their allies have decided to reduce supply in order to inflate oil prices. Further announcements from Saudi Arabia on production cuts and a growing optimism on major trade talks have seen oil recover significantly.
The decision from OPEC and ally countries like Russia in December to cut production was seen as a big policy shift from mid-2018 when President Donald Trump urged the cartel to tame rising prices as they proceeded to boost supply. Oil prices have also risen due to other reasons, such as US sanctions of Iran as well as comments made about Venezuela’s leadership struggles. The International Energy Agency went on to say that these restrictions have reduced heavier crude exports which have caused some disruptions for refiners, despite the fact that lighter supplies coming from countries like the US continue to increase.
“[The oil price] is finding tailwind from generally positive market sentiment associated with optimism about the continuation of trade talks between the US and China,” said Carsten Fritsch, a strategist at Commerzbank. “We just happened to have created a situation where there’s an oversupply, and inventories have veered off from the range we brought them to in the first half of 2018,” he added, referring to market balances at the end of last year when prices dropped by 40 percent.
BP released a report a few days ago in which it concluded that oil demand would remain strong for at least twenty years. Even if ambitious targets set by the Paris climate change accord are upheld and renewable energy adoption drastically increases, the company has found that demand for crude would drop only by 20 percent under such a situation. In reality, that figure would likely be much less.
“The world of energy is changing. Renewables and natural gas together account for the great majority of the growth in primary energy. In our evolving transition scenario, 85% of new energy is lower carbon,” said BP’s chief economist Spender Dale. However, he added that oil will still remain integral to the energy demands of the world. “Oil is playing a major role in the energy system out to 2040… even with renewables off the charts. The level of understanding about the arithmetic on some of this stuff is not as high as it could be.”
Overall, hopes for a possible trade deal and fewer OPEC barrels entering the market is overcoming the fears of a swelling US shale production. The US energy department expects the nation’s output to increase by 1.5 million barrels a day this year and a further 790,000 barrels a day in 2020, which would bring production levels to record highs of over 13 million barrels a day.