A scorching summer in the Middle East could drive oil prices higher

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The reopening of the national economies after lockdowns and the resulting increase in tourist traffic have driven crude oil prices to the level last seen years ago. Now something else can push them even higher: the weather.

Summer is hot in the Middle East. It is the peak season of electricity consumption as air conditioners become vital. This year, according to a Bloomberg report, the consumption will be even higher than usual due to the higher temperatures.

The report mentions power consumption in Kuwait, which hit a new record this week as summer started earlier than usual. The report also found that Saudi Arabia burned 25 percent more crude oil than normal for electricity production last year. The kingdom also said at the time that it may need to increase its domestic consumption for electricity generation by 1 million bpd.

At first glance, as the report suggests, this could drive oil prices higher. For OPEC members, especially in the Middle East, higher prices would be welcome. But it would also motivate buyers to look for alternative suppliers who offer better bargains.

India already did this earlier this year when Saudi Arabia increased its prices for Asian buyers. The third largest oil consumer in the world right away Cut orders for Saudi crude after Aramco raised official selling prices to Asian buyers by $ 0.40 a barrel in April. The brief rift that ended with Saudi Arabia cutting prices showed a change in the dynamics of the world oil market. In addition to OPEC members in the Middle East, India now has even more suppliers to choose from.

There is also another reason why the increased oil consumption in the Middle Eastern countries is unlikely to have any noticeable impact on prices, even if the above-average hot summer forecasts come true. All OPEC members in the Middle East are suspended because of their production quotas under the OPEC + Agreement, which shrank the global oversupply of oil by keeping production around 7.7 million bpd lower than before for months during the worst of the pandemic some free capacity.

It can take a while for this free capacity to come back online – around a month, according to the MSRP definition free capacity – but it is there and can be tapped if necessary. And it might become necessary despite recent signs from OPEC + showing members of the enlarged cartel would stick to their original plans of not adding more than 2 million bpd into production by next month. What could – and probably would – drive oil prices soar this summer would be primarily a demand that is recovering faster than most expected, including the International Energy Agency, which recently urged the energy industry to shed all new oil and suspend US gas exploration pursuit of net zero emissions. The same IEA last week called OPEC wants to cut back more production in order to avoid a further increase in prices.

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Still, more oil could soon come from a country exempt from OPEC + production cuts. Speculation that Iran will return to global oil markets is rife, and there are doubts that Iran can actually resume production as quickly as it says it is, but it will certainly try.

The latest from Tehran is that Iran could go back to a daily average of 4 million barrels within 90 days. Most of it would be back online within a month, said an official with the state oil company, as quoted by Iranian state media this week.

Higher summer temperatures than usual in the Middle East would challenge the region’s power grid. Still, it is unlikely that the oil markets will be affected for much or very long. The prices are already high enough to make some buyers nervous. If they go much higher, they’ll dampen demand, and no one wants that just when it recovers that well. Gulf states may need to use their spare capacity to keep prices in check or, if they feel adventurous, watch them climb closer to the $ 100 mark and risk market share to the United States, Russia, and other vendors who would be only too happy to step in and close the supply gap.

By Irina Slav for Oil Genealogie

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