The “pandemic fluctuation” of oil prices

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By JOSÉ LUÍS FIORI*

The price of oil is likely to be affected by some “geopolitical hiccups”

“If Brazil wants to be a market economy, it has to have market prices”
(Roberto Castelo Branco, ww1.folha.uol.com.br, 25/02/2021)

On March 10, 2020, the World Health Organization diagnosed the existence of a global-scale pandemic that was taking its first steps outside of China, where it had been identified in the last days of December 2019. almost automatic suspension of economic activity city ​​et world caused an instantaneous and immediate drop in production, employment and consumption, with a ripple effect faster, more pronounced and more universal than the great economic crisis of the 1930s. As is now widely known, this instantaneous shutdown of the world economy had a “deafening” impact on oil demand, with a sharp drop in prices, which turned negative for a few days: a 40,04% drop in the average price of a barrel of oil in March 2020, followed by a new fall of 29,23% in April, collapsing from US$ 63,60 b/d in February, to US$ 23,34, in April of the same year. After that, despite the worsening of the pandemic around the world, in particular in the United States, which became the world's epicenter for the spread of the disease, oil prices recovered slowly and gradually throughout 2020, with the exception September and October, when there was a slight decrease of -7,16% in the first month and 1,51% in the second. After this small negative fluctuation, prices resumed their upward trend, reaching around US$50 in the last month of the year.

At the beginning of 2021, several studies and analyzes carried out by private consultancies – Deloitte, Barclays Bank and Wood Mackenzie – and international and national organizations – OPEC and EIA – showed the social, political and geopolitical rooting of economic decisions in the O&G sector in the variation of international oil prices – Brent and WTI – since the onset of the global coronavirus pandemic. All these organizations point to the covid health crisis as preponderant factors in determining the international prices of this commodity throughout 2020 and in the next two years, that is, the ability to control the virus (and its new variants) and the speed of vaccination; geopolitical disputes around oil – level of production and energy transition; and the incidence of unexpected weather events. Those strictly technical, technological, business management or market variables are considered secondary.

Such negative effects were mitigated and allowed for a slow and gradual recovery in prices throughout 2020, due to advances in research on vaccines for the virus, the relative containment of the speed of transmission of the virus in some countries and, mainly, two strategic decisions of central actors in the political economy of oil: the member states of OPEC, the other large oil producing and consuming states, and also their large state or private oil companies. OPEC+ (the 13 members of OPEC plus Russia), first in April, with a cut of around 10% of the global oil supply and, later, in December 2020, with a new announcement of a cut of 500 thousand barrels/day of global supply, which dropped from 7,7 MB/d to 7,2 MMb/d. Furthermore, at this December conference, OPEC+ announced that it intended, in 2021, to gradually resume additional production of 2 million b/d, subject to periodic assessments carried out by all member countries in monthly meetings. In March 2021, the measures to contain supply, applied in January and February, despite pressure from Russia, were extended until at least April 2021.

During 2020, and in particular after the month of April, right at the beginning of the Coronavirus pandemic, the slow but regular recovery of oil prices in 2020, the Chinese control of the epidemic and its economic recovery weighed heavily on , which made China the only country in the world with a positive average GDP growth of 2,3%. At the end of the year, the Democratic victory of Joe Biden, in the United States, created an immediate expectation of massive vaccination and control of the American pandemic, with the resumption and recovery of its productive activity - the same should be said in relation to countries- members of the European Union. At the same time, the main financial and oil market analysts bet on the resumption of production in the OPEC countries, which had established, in April 2020, an average cut of approximately 10% of the global offer of its member countries and also from Russia, which is not officially part of the organization. In addition, Biden's victory created the expectation of loosening the sanctions imposed on Iran and Venezuela, which would allow increasing the global supply of oil to meet the expected increase in demand, without it being necessary to increase the price level much above where they were just before the start of the pandemic and the economic crisis of 2020. Therefore, Morgan Stanley and several other agencies and oil market analysts predicted a stabilization or possible fall in the price of oil, until the second half of 2021, around from US$50 or US$55 p/b/d.

Likewise, to the surprise of analysts and their stabilizing forecasts, between the months of December 2020 and February 2021, the price of oil jumped by almost 35%, reaching US$ 73,38 in the first days of March, in Asian markets. Soon afterwards, it retreated 1,6%, going to US$ 68,24, and everything indicates that it could stabilize at this level, if there are no new health surprises and “geopolitical bumps” characteristic of this strategic market that operates in a completely different way from other industrial markets.

Now, what factors could have changed this route of regular rise in the price, with a bump that raised it above $70 in early March? A sum of decisions and events that were not computed in the analysis and forecast models used by the "still president" of Petrobras, who usually speaks of the "oil market" as if he were doing a microeconomic analysis of the "banana market"

On the health and political side: i) the rapid deceleration of contagion in the United States after Biden took office, added to the approval, by the American Congress, of an economic stimulus package worth US$ 1,9 trillion, raising to US$ 5 trillion spent on economic aid programs against the pandemic, equivalent to 25% of American GDP; ii) the economic package of the same nature – worth 750 billion euros – which was approved by the European parliament as aid to the countries hardest hit by the health and economic effects of the pandemic; iii) and, finally, the forecast of a 6,5% growth of the Chinese economy in 2021, which should have an impact on the entire Asian region, which more efficiently controlled the expansion of the pandemic and its economic contagion;. Everything points to a horizon of slow recovery in demand and economic activity, perhaps in the second half of 2021, if new major health or geopolitical surprises do not happen.

Yes, because they also weighed on the unexpected acceleration in oil prices in the first two months of 2021, some accidents along the way and some geopolitical events with an instantaneous effect, without any hierarchy of importance in this list, which includes: i) the cold wave and the drop in oil production in the state of Texas, in the United States; ii) the Houthi rebels in Yemen, first to the port of Ras Tanura, used by Saudi Arabia to export its oil, and a week later to a set of Saudi wells and refineries; iv) attacks of unidentified origin against oil installations in Syrian territory; iv) the loss of confidence among analysts and investors regarding the possibility of relaxing US sanctions against Iran and Venezuela, which could facilitate an increase in the supply of oil by these countries that hold large reserves; v) and, in the same line of arguments, the fact that the first initiatives of the Joe Biden government are pointing in the direction of maintaining or worsening the competition and rivalry of the North Americans in relation to Russia, with the expectation of new sanctions, especially against his great project to build the gas pipeline between Russia and Germany, through the Baltic Sea, the Nord Stream II, and even more so after President Biden's personal attacks on his Russian counterpart, Vladimir Putin; vi) and finally, with regard to China, especially after the holding, on March 12, 2021, of the first meeting of the QUAD, “Quadrilateral Security Dialogue” bringing together the United States, Japan, India and Australia, which decided to strengthen their economic and military ties, with the construction of a new military ring around China, and which was followed by an extremely tense meeting between the head of the US State Department, Antony Blinken, and the Chinese Minister of Foreign Affairs, Wang Yi, held in Alaska on March 18 and 19, 2021.

Adding and subtracting, everything indicates that the price of oil should remain or fluctuate between the values ​​of US$ 55-65 in the coming months, as long as it depends exclusively on market factors. But the most likely thing is that it will be affected by some “geopolitical hiccups” that should follow one another and intensify in the second half of 2021, possibly raising this price to 70 or 75 dollars, to the scandal of Mr. White Castle.

* Jose Luis Fiori Professor at the Graduate Program in International Political Economy at UFRJ. Author, among other books, of History, strategy and development (Boitempo)

 

 

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