Here’s a chart of the oil price.
In the past two years, oil has been traded as cheaply as $19 a barrel (or below zero if you were buying a US blend called West Texas Intermediate) and as high as $139 a barrel.
We have not seen such huge swings in the oil price since the 2008 financial crisis, when oil crashed from $150 a barrel to below $40 as fears of a global recession saw demand collapse.
This time around, the volatility of the oil price has been caused by several factors: the Covid-19 pandemic; the energy transition; under-investment in new projects; politics within Opec, the cartel of 13 major oil-producing countries; and above all by the unpredictability of Russia.
The result has been misery for motorists, a sharp spike in inflation, and a blame game in the US ahead of midterm elections in November.
FT Edit has distilled the best of the FT’s oil price coverage to explain what is driving the market and why volatility is likely to continue.
A price war during the pandemic
As the world began to lock down in the face of the Covid-19 pandemic in early 2020, halting travel and shuttering factories, an obvious response would have been for oil-producers to slash their output.
Instead, Russia decided to keep pumping in order to depress prices to the point where US shale oil producers, with their higher costs, would lose money on each barrel.
[Russia] had bristled as shale production spiralled ever higher thanks to its price-supportive cuts with Opec. Washington’s decision last month to sanction the trading arm of Rosneft, the state-controlled Russian oil champion, only deepened Moscow’s animus against the US oil patch.
In the background was Igor Sechin, Rosneft’s boss and close confidant of President Vladimir Putin. He was long opposed to the cuts with Opec and personally affronted by the new sanctions. The coronavirus crisis offered an opportunity to strike. “This action was not about the oil market. It was about egos and getting even,” said one Opec delegate.
Extract from Eight days that shook the oil market — and the world, March 13 2020
In turn, Saudi Arabia decided to fight Russia for market share and moved to flood the market with oil, raising production to an all-time peak of 12m barrels a day and cutting prices by as much as $8 a barrel.
The timing could not have been worse. As Saudi Arabia opened the taps demand cratered, as more and more countries went into lockdowns around the world.
Eventually, the Trump administration succeeded in convincing Saudi to cut production and allow prices to stabilise. Opec agreed to start cutting 9.7mn barrels a day of production in May, just under a third of its daily output.
But before the cuts came into force, the world’s storage tanks had already filled up, and major hubs such as Cushing, Oklahoma had nowhere to put any more oil. At the end of April, the world saw the oil price in the US turn negative for the first time, as traders started to pay people to take oil off their hands.
The complications of the energy transition
But geopolitics was not the only thing causing wobbles in the oil market. The ructions of the pandemic accelerated calls for oil companies to speed up the energy transition, as lower oil prices forced the US shale sector to take a $300bn write down, and already sceptical investors sold off shares in Big Oil.
After writing off billions from the value of its global oil assets in June, BP said it would review its exploration plans and said cuts would “better enable us to compete through the energy transition”. Shell also vowed to “adapt to ensure the business remains resilient”.
As the oil majors start to step back from investing in new exploration and production, the world is becoming more reliant on state oil companies.
Can national oil companies pump enough?
As lockdowns lifted towards the end of 2020 and oil demand ticked up, Opec+, a group that includes the original 13 Opec members and another 10 countries, including Russia, only increased production a small amount, arguing that the virus might cause further economic disruption.
“The recovery has not been even across the world,” said officials on a Opec+ ministerial committee monitoring the historic supply-cuts deal. They recommended that the expanded group of countries including Russia should take “further necessary measures” when needed. [ . . . ]
Amrita Sen at consultancy Energy Aspects said Saudi Arabia and its partners inside and outside Opec are “hoping for the best, but preparing for the worst”.
“Asian demand — a key destination for Middle East oil — is broadly picking up, but consumption in the west is going the other way. It’s so difficult to forecast anything,” she said.
Extract from Opec keeps strategy under wraps in oil stumble, September 22 2020
But the group was also constrained by the ageing infrastructure of some of its members, such as Nigeria and Angola who failed to even hit their share of the relatively modest production target.
Russia starts a war
Prices spiked again when Vladimir Putin invaded Ukraine in February 2022. European countries were initially wary of putting sanctions on energy because of their dependence on Russian gas, but by May the EU had agreed to ban seaborne Russian oil by the end of 2022.
The bloc also took the opportunity to emphasise the need for a transition to other energy suppliers, and greener alternatives, pledging to spend €195bn.
On Wednesday, the European Commission will unveil a €195bn plan aimed at providing remedies, emphasising the need for more renewable energy, lower consumption and reliable alternative suppliers. But the plan will also mark an attempt by Brussels to knit together the EU’s energy infrastructure in a more cohesive way, eliminating bottlenecks and ending delays to projects such as the Midcat pipeline.
“If we had made these interconnections when they were agreed [with France in 2014 and subsequently], Europe would not now be in this situation of dependency [on Russia],” said Portugal’s prime minister António Costa when he met counterparts from Italy, Spain and Greece in Rome in March.
Extract from Europe’s push to plug its energy gaps, May 16 2022
A volatile future
The scale of the energy transition, and geopolitical uncertainty, are likely to hang over the oil market well into the future.
ExxonMobil’s chief executive, Darren Woods, predicted more investment in oil and gas but acknowledged that oil companies are struggling to make big calls during such uncertainty.
“These are multibillion-dollars investments with long time horizons,” he said. “How do you think about that with the uncertainty associated with the transition? That is a difficult balance to strike.”
Extract from ExxonMobil chief predicts continuing surge in oil markets, June 27 2022
Meanwhile Shell’s chief executive Ben van Beurden said he would not reverse previous decisions to cut back on investing in projects. But he noted that the commodity shock from the Ukraine war has at last set governments scrambling to address the various problems in the global energy system.
“On energy security matters, energy balances, investment levels, I’ve never had as good a set of discussions with governments as we are having today,” van Beurden told the Financial Times.
Extract from Shell boss van Beurden: ‘Supply needs to adjust but to less demand’, July 20 2022
