OPEC and the entire energy industry should thank Saudi Arabia for helping oil prices recover from negative territory last year, and the market would be best left to the Kingdom to manage, according to a senior investment banking energy commentator.
“They’ve done a magnificent job of managing their production program in the Covid era,” Robert Yawger, executive director of Energy Futures at Mizuho Securities said in an interview on Bloomberg Television.
Crude oil futures fell below zero for the first time in history on April 20 last year as demand evaporated amid widespread lockdowns in response to the coronavirus pandemic.
That was an “unprecedented event” and “left a terrible scar on the industry,” said Yawger. “It rallied back under the management of the Saudis.
The rest of OPEC has a lot to thank them for. Anyone that has anything to do with energy has a lot to thank them for, for that matter.”
WTI crude, the US benchmark, reached a six-year high of $76.98 on July 5 as OPEC+ failed to find agreement on output quotas, but has edged lower since then as the UAE and Saudi Arabia hammered out a compromise. The group will raise output by 400,000 barrels a month from August for 14 months.
While discipline on production has helped bring prices back, the market is at risk if renewed lockdowns hurt demand, said Yawger.
“I understand that everyone wants to get as many barrels on the market as possible, but you just can’t do that,” he said. “You cannot flood the market. It’s a very fragile state right now.”
“In my opinion, it’s best to let the Saudis manage it; they’ve done an incredible job. As long as they don’t flood the market themselves,” he said.
“Everybody remembers negative prices. That was the result of the price war last year. They all came to the assumption that it’s better to keep the barrels off the market and let the Saudis take charge and manage the situation than let prices slide in that direction again. Nobody can sustain that kind of slide for very long.”
“I don’t know if we’re going to see that $76.98 number again. That may be a challenge.”
US COVID-19 cases have climbed in recent weeks, reaching almost 64,000 yesterday compared with below 10,000 a day at the beginning of the month. However, that’s down from the peak in January of more than 250,000 new cases per day.
“If we have a COVID flare up that’s a third of what it was last fall, we have a serious problem on our hands and demand would not be that supersized as a result,” said Yawger. “If everybody was vaccinated we would not even be having this conversation. —AN