Unquestionably, the most significant event of the past two weeks and possibly the last few months that was expected to shape the future of the globe for decades to come was the climate conference held in Glasgow. It was supposed to ensure that the commitments undertaken in the Paris climate agreement of 2015 will be enforced. The main target of the accord was to keep global warming at maximum 2 °C but preferably 1.5 °C above pre-industrial temperature.

After two weeks of onerous negotiations an agreement was reached, which was not hailed as a failure. In the words of the UK’s prime minister, it was a “game-changing agreement” which sounds “the death knell for coal power”. In the same breath Boris Johnson admitted that sovereign nations cannot be dictated into reducing carbon emission. Yet, he attempted to put a positive spin on the outcome by declaring that the world is heading in the right direction in mitigating the impacts of global warming. The very same prime minister had warned two weeks ago that it is “one minute to midnight”. The face of the COP26 president, Alok Sharma, and his subsequent apology after he announced a last-minute change in the wording of the agreement clearly showed that the uphill battle against climate change is just beginning and it will be a steep climb. This sudden correction was to “phase down” as opposed to “phase out” the use of coal power. A brief survey in our office amongst the linguistically more proficient colleagues confirmed the suspicion that “phase down” is not a widely accepted and commonly used term. It is more of an invention than an expression raising questions how seriously the final accord can be relied upon going forward. So, what exactly does the agreement, which is meant to guide countries and companies to reducing emission until net zero level is reached by 2050, contain?

It requires countries to re-submit their action plans by the end of next year on how they intend to reduce carbon emission for 2030. Although burning of the most harmful fossil fuel, coal, that does not capture, and store carbon emission will only be “phased down” and not “phased out” the latter phrase is still included in the demand to cease “inefficient” subsidies for fossil fuel. Perhaps the most positive achievement of the conference was the deal between the world’s two biggest emitters, the US and China, in strengthening co-operation in the attempt to fight global warming. The two sides called for extra efforts to narrow the gap that remains in achieving the ultimate objective.

More than 100 countries pledged to halt and even reverse deforestation. A plan was also launched by over 100 participating nations to cut methane emissions by 30% by 2030. In excess of 40 countries promised to shift away from coal and halt investments in new coal power generations domestically and internationally. The US, China and India have not signed up for the deal.  A great number of private financial institutions agreed to support clean technology and move away from financing fossil fuel projects. Developing countries that suffer the most from the carbon emitted by developed nations were assured of an increase in funding beyond the already promised $100 billion per year. Commitments made during COP26 are voluntary. In an emollient tone one might conclude that immediate disaster has been avoided but reaching the Paris target is still a nearly impossible task. The outcome of the conference re-enforced our view that despite the pledges and promises reliance on oil will continue in years to come.

To release or not to release?

One of the main campaign promises of the Biden administration was the fight against global warming. It included the support for green technology and the ban on leases for new drilling on federal land. As the global and the US economy recovers from the pandemic-induced destruction the thirst for oil keeps rising and is expected to match the 2019 level as early as next year. This naturally leads to a tighter oil balance which drives prices higher, seemingly above the pain threshold of the US. There are several ways to deal with rising domestic fuel prices but encouraging production is not one of them as it would go against the green agenda of the administration.

Re-introducing the ban on crude oil exports to tame oil prices is another unlikely tool to be employed. All it would do is to take barrels off the international market. Putting pressure on OPEC+, threatening the revival of the NOPEC bill or releasing crude oil from SPR seem the most obvious ways to deal with the issue. The producer group would flatly deny upping production as the oil balance is set to deteriorate in the first half of next year. Using strategic stocks would be a curious move as there is no shortage of oil; the US president admitted that much in his memo to the US State Department last Friday. In it he acknowledged that there is enough petroleum available in the open market for other countries to reduce their Iranian purchases. If he is correct then it means that the US is not saying that high prices are the fault of OPEC+, it merely blames them for it. It also implies that no nuclear deal with Iran is imminent. Consequently, there is a good chance that in coming months the market will be left to its own device, and louder calls on releasing SPR or pushing OPEC+ to increase supply will remain on the level of rhetoric.

When market forces are at work high oil prices usually lead to declines in demand growth and incentivize producers. This cycle of life was reflected in the latest monthly reports from the EIA and OPEC. The former upped non-OPEC supply, including that of the US. In its latest monthly estimate, the EIA sees shale production in the Permian Basin to exceed the pre-pandemic peak.  The latter cut global oil demand for the incumbent quarter of 2021. It will be interesting to see whether the IEA, which releases its own findings this morning agrees with these revisions. If it does, then this year’s highs might have been reached three weeks ago and the fears of inflation and the strong dollar could also act as break on any attempt to push prices higher despite yesterday’s impressive recovery from the morning’s trough.