Crude prices lose ground as IEA says fossil fuels will have to go in long term

There was good news and not so good news on the market this week and the oil price reacted accordingly. The International Energy Agency suggested it was time to stop investing in hydrocarbons and positive outcomes on Iran sanctions were announced. In Friday trading, Brent crude lost ground, having topped US$70 a barrel mid-week and finished the week close to US$66 with WTI below US$63 a barrel. The world will welcome an end to any deal that might encourage a more cordial relationship with Iran and the US and the wider international community. Talks with key global officials and the EU have been going on for several weeks with sceptical progress. Iran’s President Hassan Rouhani announced that all parties had agreed "to lift sanctions on Iran’s oil and shipping sectors as well as sanctions on the Central Bank and others". Not a done deal Reported comments from various European officials said they were making progress, but it was not a done deal yet as many issues remained. The lifting of sanctions will certainly impact global oil supply, but it’s not likely that millions of barrels will return to the market immediately. Energy infrastructure will need to be upgraded after years of neglect due to sanctions, but it’s estimated that the country could revamp by up to 1.5 million barrels a day by the end of the year. Iran has managed to export limited quantities of oil in recent years, but with the possible lifting of sanctions, many refineries in India and other countries will be doing deals. A report from PVM Oil says, “this points to pent-up demand for Iranian crude,” adding that "the looming wave of fresh Iranian supplies will unlikely upend the prevailing supply deficit". The big news of the week had to come from the IEA suggesting that all investment in exploration and production for new hydrocarbons must stop now. In their report, “New Zero by 2050: A roadmap for the global energy system,” the IEA argues that in order to achieve emissions targets and give the world “a fighting chance” of bringing global warming to 1.5 degrees Celsius; then fossil fuel has to go. Not discriminating The agency is not discriminating, saying coal, gas and oil have to go in the long term. The IEA would like to see greater advances in transportation and says that combustion engines must be halted by 2035 when all road transportation will hopefully be electric. The new greener focus from the Biden administration will not be sympathetic to big oil in the US in the coming years but the shift will not be an easy one. Speaking at the virtual Columbia Global Energy Summit,” the executive director of the IEA, Fatih Birol appealed to the US to send an “unmistakable signal” to investors to expand green energy in emerging economies. Hydrocarbons account for about 80% of the global energy mix right now and while many oil companies talk about getting to net-zero; they had not factored in such a drastic directive in exploration and production.  The report suggests that total energy investment will need to rise to US$5 trillion by 2030 from the current estimated US$2 trillion. Critical of pledges The IEA was critical of pledges made by oil producing governments, urging them to do better to reach net-zero and adding, “no new oil and natural gas fields are needed in the net-zero pathway". Middle Eastern producers can claim the low-cost producer spot but all have announced new exploration and new finds in the last few months. Countries like Iraq and Iran will find a fast transition challenging as the health of their economies are so closely ties to oil exports. There’s been little comment from oil producers as they digest this report, but many analysts fear investment funds will be swayed by this IEA report in the months to come. There’s been no official response from OPEC producers this week but this will no doubt be high on their agenda when the group meets next week. OPEC has always argued that sustained investment in oil and gas is needed to fund the energy transition and any shortfalls will mean a near future of unwelcomed volatility and possibly unacceptable high prices.