Shifting from demand to supply woes, oil posts over 50% gain in 2021

OPEC+ decisions, output disruptions due to cold snap in Texas, storms in Gulf of Mexico and crucial supply/demand fluctuations mark milestones in 2021.

Shifting from demand to supply woes, oil posts over 50% gain in 2021

Oil prices increased more than 50% in 2021 after starting the year under demand pressure from the COVID-19 pandemic, with the market turning from demand concerns to supply concerns by the end of the year.

International benchmark Brent crude, which recorded a 51% increase by the end of the year, opened at $51.50 a barrel in the first trading day but closed the year at $77.78 a barrel. Brent climbed to $86.70 a barrel in October during the peak of the energy crisis that engulfed the whole world.

The American benchmark, West Texas Intermediate (WTI), meanwhile, yielded a better result with a 53.3% gain last year. WTI opened trading at $48.40 a barrel last January and closed the year at $74.21 a barrel. The benchmark posted its highest price in October of $85.41 a barrel.

Impact of OPEC+ decisions in 2021

Pressured by low demand concerns with many big economies under strict lockdowns with the imposition of various mitigation measures, oil prices started the year with a surprise decision by the Organization of Petroleum Exporting Countries (OPEC) and its allies, known as OPEC+.

The OPEC group declared that Saudi Arabia would voluntarily reduce its production in February and March by 1 million barrels per day (bpd), and that Russia and Kazakhstan would collectively increase their output by 75,000 bpd while the rest of the group would hold output steady.

Oil prices started the year with 11-month record high prices, with Brent hitting $55.99 and WTI registering $52.24 on Jan. 8.

Jan. 20 marked a milestone for US politics with the inauguration of Joe Biden as president. The possible return of Iran to the oil market was on Biden’s agenda during his election campaign and he vowed that the US would rejoin and expand the nuclear deal, formally known as the Joint Comprehensive Plan of Action, should Tehran return to "strict compliance."

On Feb 4, Brent oil price hit its highest level since February 2020 and started trading at over $59 a barrel after OPEC+ agreed on full conformity to the group’s production cuts.

Prices were also negatively affected by the slow pace of vaccine campaigns, concerns over the availability of vaccines in all countries, and the effectiveness of the existing vaccines amid the emergence of different virus variants.

On Feb 15, prices jumped to their highest level in 13 months with increasing hopes of a speedier oil demand recovery.

Supply disruptions due to a cold snap in the southern US state of Texas brought the largest oil-producing state’s oil wells and refineries to a halt in February. Amid criticism over the region’s poor infrastructure, almost 65% of production in the area was disrupted.

Prices also gained support from Biden’s $1.9 trillion coronavirus relief bill which was signed into law in March. Along with $1,400 in direct payments and up to $3,600 in child tax credit, the plan encompassed boosting funds for state and local governments reeling from the coronavirus pandemic.

On March 4, OPEC+ members agreed to extend production cuts for another month through April, except for Russia and Kazakhstan. Saudi Arabia’s two-month output cut by 1 million bpd was also extended for an additional month through April.

Suez Canal blockage causes global energy crisis

The group’s decision to roll over output cuts in April pushed the price of Brent to over $69 a barrel.

Global markets were faced with another supply disruption after a 400-meter-long container ship, the Ever Given, blocked the Suez Canal on March 23, impeding all waterway traffic for six days.

On April 1, the OPEC+ group agreed to incrementally increase output. The agreement covered the phasing-out of Saudi Arabia's additional production cut of 1 million bpd to bring the group’s collective production to 5.8 billion bpd in July.

While the economy of the world’s largest oil importer, China, showed signs of recovery, one of the largest oil-consuming countries, India, began fighting with the delta variant of COVID-19, which put prices under pressure for a few months.

On May 8, the Colonial Pipeline in Houston, Texas, which carries 2.5 million barrels a day of diesel, gasoline and jet fuel, was completely knocked offline by a cyberattack for five days.

On July 18, the OPEC+ group agreed to a production plan from August onwards following a two-week halt in talks after the United Arab Emirates (UAE) refused new production rises based on "outdated output baselines." The group finally resolved the disagreement by updating not only the production baseline of the UAE but also of Saudi Arabia, Russia, Iraq and Kuwait. The OPEC+ group also increased output by 400,000 bpd from August to December and extended its production cut agreement from April 2022 to December 2022.

Oil production in the Gulf of Mexico saw several disruptions starting from August to prop up prices, the first of which was a fire on an offshore oil platform in Mexico which reduced production by 444,000 bpd - a volume equivalent to the OPEC+ output increase for August.

Tropical Storm Ida in late August and Tropical Storm Nicholas in mid-September also brought production in the region that contains more than half of the country’s petroleum refining capacity to a halt.

OPEC+ ignores US' calls to pump more oil, starting a drive to release emergency reserves

Shortly before OPEC+ held its ministerial meeting on Sept. 1, the US urged OPEC and its allies to boost oil output to tackle rising gasoline prices which the US saw as a threat to the global economic recovery. However, the OPEC+ group ignored calls from the Biden administration and stuck to the existing production decision of 400,000 bpd.

In a surprise move on Sept. 5, state oil giant Saudi Aramco lowered the cost of Arab Light crude for its Asian customers by $1.30 in October. The largest monthly reduction in a year indicated falling demand in the region and weighed on prices.

September also saw rising natural gas prices, first in Europe and then worldwide amid tight supply concerns ahead of growing consumption in the winter season.

In an unexpected move, China said it would release crude from its Strategic Petroleum Reserves (SPR) on Sept. 24, following the US’ announcement of its oil sale from its SPR.

The OPEC+ group’s decision to keep the production increase rate unchanged in November rebuffing the US’ insistence on raising output, coupled with rising crude demand boosted by record-high natural gas prices, pushed the price of Brent to over $81 a barrel. On Oct. 8, crude oil prices rose to $80 a barrel in the US, reaching a seven-year-high level.

The major oil producers of OPEC+ once again agreed to keep the production increase rate unchanged for December, refusing Biden’s call from a news conference at the United Nations Climate Change Conference (COP26) in Glasgow, Scotland to pump more oil to halt rising oil prices.

In an attempt to provide additional market supply and lower crude prices, Biden said his country would release 50 million barrels of oil from the SPR and called on major oil-consuming countries to follow suit. China, India, Japan, South Korea and the UK vowed to release oil from their respective reserves. Nevertheless, the OPEC+ group turned a blind eye to the US-led SPR sales move and said it would not pump more oil than previously scheduled in January.

Just as the new COVID-19 variant omicron dented some of the oil price increases, Saudi Arabia said it would raise crude oil prices for Asia and the US.

Halted in June since the election of Iran's new hardline president and only resuming on Nov. 29, negotiations over the possible resumption of the landmark 2015 nuclear deal between Iran and six other powers resumed in Vienna on Nov. 29. However, the talks were postponed for a week due to the Iranian government’s “sweeping demands”.

Hüseyin Demir