What is happening with the oil market today?

2021-08-16T18:29:33.438Z

The increase in demand for oil, followed by the increase in prices, usually triggers an increase in supply, but it is not happening.

The price of a barrel of oil reaches US $ 70 0:52

London (CNN Business) -

Are the supply and demand fundamentals that have ruled oil markets for decades falling apart?

In normal times, an increase in demand and prices would trigger an increase in supply.

But, as the past week has shown, these are not normal times.

The Latest: Just two days after the Biden administration urged swift action to move toward a low-carbon economy, US national security adviser Jake Sullivan appealed to OPEC + to increase production of oil in order to curb the rise in gasoline prices.

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The glaring contradiction reveals an uncomfortable fact: the world still needs oil.

But there is mounting pressure on big oil companies to ditch fossil fuels, and American producers are saddled with debt.

This leaves Saudi Arabia, Russia and their OPEC + alliance taking a cautious approach and slowly undoing production cuts despite the 60% rise in the price of Brent crude in the last year.

This means that supply could remain tight in the coming months.

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One compelling reason: Growing investor concerns about the weather are limiting output growth for oil companies that are accountable to shareholders, Per Magnus Nysveen, Rystad Energy's chief analyst told me.

Here's a look at it: Last year, global investment in oil and gas field development fell to about $ 348 billion, up from a peak of $ 740 billion in 2014, according to analysts at Morgan Stanley.

They calculate that the lack of investment in public companies will start to lower their production from 2024.

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US shale gas producers have also kept production relatively flat, under pressure to pay back shareholders after the spending rush of the last decade.

At the same time, the demand has increased.

Although the recent rebound in oil prices has lost steam amid a surge in covid-19 cases of the delta variant, the International Energy Agency (IEA) has kept its forecast largely unchanged. growth in world oil demand for next year.

In a report published last week, it is stated that the market could continue to have a slight shortage of supply towards the end of the year, despite the decision by OPEC + to ease production cuts.

In addition, he added that next year there could be more supply.

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Remember: The delta variant poses a risk to oil demand in the short term, but the world economy is still forecast to grow 6% this year and 4.9% in 2022, according to the International Monetary Fund.

In the longer term, demand is likely to be "difficult to sustain," as the world's population grows and GDP per capita rises, Morgan Stanley commodity strategists Martijn Rats and Amy Sergeant wrote in a note from research last month.

"Combined, this leads to a growing supply / demand deficit beginning in 2024," they added.

What it means: a more OPEC-friendly environment and a sustained rise in prices.

The alliance already controls more than a third of world oil production, which rises to about 50% if non-OPEC producers such as Russia and Mexico are included.

"In 10 years, OPEC's production quota will be higher," Nysveen said.

Given the decline in investments from rivals, OPEC may no longer have to offset short-term oil price support with long-term market share defense, Rats and Sergeant added.

They expect Brent to be in the upper-middle range of $ 70 for the remainder of the year and well above $ 70 a barrel through 2022.

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One big question mark: it took several rounds of negotiations recently for OPEC + to agree on production increases, and there are doubts as to whether the alliance members will respect production restrictions.

"Members of OPEC + are seduced by higher prices, which often means a break in discipline and produce more for higher income," Tom Kloza, global head of energy analysis at the Price Information Service of the OPEC, told me. IHS Markit Oil.

Bottom line: despite billions of dollars invested in low-carbon energy sources, the world still needs oil.

"The global oil industry is striving to find new business models that will enable it to cope with the energy transition ... and continue to meet sustained demand for oil," says the IEA.

Biden: US sets path to cut carbon emissions in half by end of decade

Cineworld wants what AMC has

AMC's rapid rise in shares and its loyal following by retail investors appear to have caught the attention of its biggest rival.

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What's happening: Cineworld, the world's second-largest chain of cinemas, revealed last week that it is studying the possibility of going public in the United States.

The company said it could also opt for a "partial listing" of Regal, which it bought in 2018, in an attempt to take advantage of the huge sums of money circulating in the US stock markets.

"The capital markets of the United States are the largest and most liquid in the world and include a large number of publicly traded film companies, including companies belonging to our group," Cineworld said in a statement.

"These companies are typically covered by a significant number of US equity analysts with a broad following of domestic investors," he added.

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It's hard to believe that Cineworld didn't notice the AMC listing boom.

AMC shares are up more than 1,500% this year, thanks in part to an army of retail investors coordinating on Reddit.

By comparison, Cineworld has barely made a 2% profit.

The company's CEO, Mooky Greidinger, told the Financial Times that the IPO proposal has "nothing to do" with the recent evolution of AMC shares.

"It is just one of the many options we have in the capital markets," he added.

But the fact is, individual investors have become a powerful new force on Wall Street, and companies are embracing them.

And why not?

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AMC was able to raise US $ 587 million in June thanks to an influx of individual investors, despite the fact that none of the analysts who cover the company recommend buying the shares and the attendance to theaters remains well below the levels before the pandemic.

Keep an eye on this space: Cineworld said it will evaluate its options "in the coming months."

If he goes ahead with the listing, Greidinger can take a look at AMC CEO Adam Aron in last week's company earnings call for advice on how to win over Reddit audiences.