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A scorching hot summer in the Middle East could send oil prices soaring

Economies reopening after blockages and a consequent increase in travel have pushed crude oil prices to a level last seen many years ago. Now something else can push them even higher: the weather.

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

The report mentions the consumption of electricity in Kuwait, which this week hit a new record as the summer began earlier than usual. The report also noted that Saudi Arabia last year burned 25 percent more crude oil for electricity production than usual. The kingdom also said at the time that it might have to add 1

million bpd to its domestic consumption for electricity generation purposes.

On the face of it, as the report suggests, it could push oil prices higher. Higher prices would be welcome for OPEC members, especially those in the Middle East. But it will also motivate buyers to search for alternative suppliers that offer better deals.

India did so already earlier in the year when Saudi Arabia increased its prices for Asian buyers. The world’s third largest oil consumer immediately cut orders for Saudi crude oil after Aramco rose in April by its official sales prices to Asian buyers by $ 0.40 per tonne. barrel. The short gap that ended with Saudi Arabia lowering prices showed a change in the dynamics of the world market. India now has several suppliers to choose from in addition to OPEC members in the Middle East.

There is also another reason why increased oil consumption in Middle Eastern states may not have a significant effect on prices, even if the warmer-than-normal summer forecast goes out. All OPEC members in the Middle East are sitting on some spare capacity due to their production quotas under the OPEC + agreement, which is shrinking the excess global oil supply by keeping production around 7.7 million bpd lower than before for several months during the worst of the pandemic .

This unused capacity can take a while to get back online – about a month per. VVM definition available capacity – but it is there, ready to tap when needed. And it may become necessary despite the latest signs from OPEC +, which have shown that members of the enlarged cartel are sticking to their original plans to add a maximum of 2 million bpd in production from next month. What could – and probably would – push oil prices higher this summer would primarily be faster-than-expected demand, including the International Energy Agency, which recently called on the energy industry to suspend all new oil and gas exploration in search of net zero emissions. Last week, the same IEA called on OPEC to bring more production back to avoid a further rise in prices.

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Still, more oil may soon come from a country exempt from OPEC + production cuts. Speculation about Iran’s return to global oil markets is widespread, and there are doubts as to whether it would really be able to recover production as quickly as it says, but it will certainly try to do so.

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

Higher-than-usual summer temperatures in the Middle East would challenge the region’s electricity grid. Still, it is unlikely to affect oil markets for very, very long. Prices are already high enough to make some buyers nervous. If they go much higher, they dampen demand and no one wants it just when it gets so good. Gulf states may need to use their spare capacity to keep a lid on prices, or if they feel adventurous, watch them rise closer to $ 100 and risk losing market share to the US, Russia and other suppliers who would only be too happy to step in. enter and fill the supply gap.

By Irina Slav for Oilprice.com

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