(Bloomberg) -- Saudi Arabia and its OPEC+ allies shocked the oil market with a decision to keep supply in check, sending prices surging and adding inflationary pressure to the global economy as it emerges from the pandemic.One year on from the outbreak of a bitter price war that sent crude below zero, the kingdom showed that its priority is preserving the hard-won oil recovery rather than worrying about tightening the market too much.“I don’t think it will overheat,” Saudi Energy Minister Prince Abdulaziz bin Salman told reporters after Thursday’s meeting. Last year “we suffered alone, we as OPEC+” and now “it’s about being vigilant and being careful,” he said.The Organization of Petroleum Exporting Countries and its allies had been debating whether to restore as much as 1.5 million barrels a day of output in April. From trading houses in Geneva to Wall Street banks, much of the oil world was in agreement that global markets could use some more barrels to temper a rapid run-up in prices.But after being urged to “keep our powder dry” by Prince Abdulaziz, OPEC+ members agreed to hold steady at current levels -- with the exception of modest increases granted to Russia and Kazakhstan. Saudi minister went one step further, saying the additional 1 million barrel-a-day voluntary production cut the kingdom introduced last month was now open ended.That means the cartel will still be withholding about 7 million barrels a day from the market -- equivalent to about 7% of global demand -- even as fuel consumption recovers in many countries.“OPEC+ definitely risks over-tightening the oil market,” said Amrita Sen, chief oil analyst at consultant Energy Aspects Ltd. in London. Brent crude rose as much as 5.7% in London.Inflation RisksBrent has already rallied about 30% this year to almost $68 a barrel. Throughout the first quarter, OPEC+ has kept production below demand in order to drain the glut that built up during the worst of the Covid-19 lockdowns. Without additional supply, that deficit will widen significantly in April, according to the cartel’s internal estimates.“We expect oil prices to rise toward $70 to $75 a barrel during April,” said Ann-Louise Hittle, vice president of macro oils at consultant Wood Mackenzie Ltd. “The risk is these higher prices will dampen the tentative global recovery. But the Saudi energy minister is adamant OPEC+ must watch for concrete signs of a demand rise before he moves on production.”With the bond market already on edge for signs of inflation, the aggressive move from OPEC+ could become a headache for the U.S. Federal Reserve and the European Central Bank. And it’s not just oil that’s surging. From copper and steel to corn and soybeans, the prices of many commodities are rapidly rising.Strengthening economies, the rollout of coronavirus vaccines and continued government stimulus are among the reasons financial markets are anticipating an acceleration in price growth, although such forces are countered by weak labor markets.“We should closely monitor to avoid overheating of the market,” Russian Deputy Prime Minister Alexander Novak said in an interview with state TV Rossiya 24 after the meeting.U.S. RelationsThe decision comes at a tense moment for the Saudi-American alliance, as President Joe Biden seeks to reset the relationship with Riyadh, and particularly with Crown Prince Mohammed bin Salman.Under former President Donald Trump, the White House may have reacted quickly with a barrage of tweets to the threat of rising gasoline prices, as it did in April 2018. The reaction of the Biden administration is unclear, however, and may not be as straight forward as it balances economic priorities against green policies.Russia and Kazakhstan secured exemptions from the deal, allowing them to boost output by 130,000 and 20,000 barrels a day in April, respectively, “due to continued seasonal consumption patterns,” according to a statement posted on OPEC’s website. The two nations were granted similar allowances for February and March.OPEC+ will meet again on April 1 to discuss production levels for May, according to the statement.For more articles like this, please visit us at bloomberg.comSubscribe now to stay ahead with the most trusted business news source.©2021 Bloomberg L.P.
(Bloomberg) -- Look just beneath the surface of many of the technologies powering the energy transition and there’s a red metallic glint. Copper is a vital part of green infrastructure from grids to wind turbines, and a recent price surge threatens to make decarbonization more costly.Copper has roughly doubled from the lows seen a year ago and was near a nine-year high at the start of the month. Amid predictions of a new commodity supercycle kicking off, many analysts say the top hasn’t yet been reached for a metal that’s core to the green energy drive. Even after a 3.2% drop Thursday, the price is still up more than 30% in the past six months.Demand from renewable power generation, battery storage, electric vehicles, charging stations and related grid infrastructure accounts for about a fifth of copper consumption, according to Citigroup Global Markets Inc. With governments aiming for aggressive net zero emission targets in the coming decades, that means more clean electricity, a shift that’s likely to be copper-intensive given the $28.7 trillion grid build out required.Part of that growth will come from the need to connect new renewable power plants with customers. That’s because it’s often cheapest to build such plants wherever the wind or sun resource is strongest, which could be in the middle of the sea or an isolated desert. But that then means a lot more cabling -- using expensive copper -- than a centralized grid needed in the past.According to forecasts from BloombergNEF, the global power grid will grow by 48 million kilometers (30 million miles) by 2050. That’s enough to wrap around the circumference of the Earth nearly 1,200 times and equates to a doubling in copper demand to 3.6 million metric tons.“Cities, electrification and copper go together,” said Sanjeet Sanghera, an analyst at BNEF in London. “Copper plays an important role.”The metal is heavily used in underground cabling because of its conductivity, which is almost twice that of aluminum. That lowers the amount of energy needed to produce electricity.A 240-kilometer electricity interconnector between Britain and France called IFA2 used 9,000 tons of copper, according to the U.K.’s National Grid Plc. A planned link to Denmark of 760 kilometers will require 26,000 tons.In offshore wind projects, copper is still a relatively small component of costs, but that’s set to increase in the coming years, to about 3% by 2050 from 1% currently, according to BNEF.Vestas Wind Systems A/S estimates that a 100-megawatt wind farm using 4.2 megawatt turbines would use around 89 tons of copper in the turbines.If copper’s rally proves long-lasting and pushes up the cost of green investment, some wind farms may use cheaper aluminum where they can. Prices have risen less sharply compared with copper. Demand for aluminum in power grid infrastructure is estimated to reach 7.6 million metric tons by 2050, according to BNEF.“We see copper remaining integral for interconnectors,” said Srinivas Siripurapu, chief innovation officer at cable manufacturer Prysmian SpA. “But for offshore wind farms, there’s a lot of indications that there will be a push more towards aluminum driven by overall costs.”It’s not yet clear how much of an immediate impact copper’s price increase will have on the finances of green power operators. Turbine maker Siemens Gamesa Renewable Energy SA hedges raw materials prices a year ahead, protecting them for now.The metal’s rally has been driven in large part by investors who see demand soaring as the green revolution gathers pace. But their early optimism may end up pushing up costs for governments as they start putting infrastructure spending packages to work.Higher copper consumption for decarbonization could drive annual demand growth of as much as 3%, said Max Layton, managing director for Commodities Research at Citigroup Global Markets Inc. That will add to periods where supplies fall short, with upside potential for prices.While elevated prices mean companies have an incentive to ramp up investment in mining, which would help supplies, the downside is the length of time it takes to get projects up and running.“If this price level holds, we should see announcements of new projects coming in the market,” Raul Jacob, chief financial officer of Southern Copper Corp., said in an interview Monday. But the lags from decision to production will make the price cycle “a little bit longer than in the past.”(Updates copper price in second paragraph)For more articles like this, please visit us at bloomberg.comSubscribe now to stay ahead with the most trusted business news source.©2021 Bloomberg L.P.
By Geoffrey Smith