When President Joe Biden announced plans to release up to 50 million barrels of oil from the Strategic Petroleum Reserve to drive down retail fuel prices, many analysts warned that any effect the move would have would be to short duration. Indeed, prices were down for a very short time and have now started to rise again, with the number of triple-digit price predictions increasing.
The release of the strategic reserve was already a desperate attempt to contain gasoline prices, pushed higher by crude oil prices, themselves the result of a faster rebound in global demand and the constraints of production among OPEC members. The Omicron variant of the coronavirus, like the SPR release plans, had a transient negative effect on the benchmarks, but before long they were on the rise again.
Morgan Stanley expects Brent crude to hit $90 a barrel later this year. This is also Goldman’s price prediction. JP Morgan recently said crude could hit and top $100 this year, noting OPEC’s declining spare capacity. The latest to join the bullish chorus is Vitol, whose head of Asian operations told Bloomberg last week that oil still has some way to go due to tight supply.
What this means for the Biden administration and its efforts to keep gasoline affordable for voters ahead of the midterm elections is no good. Perhaps more SPR releases could be arranged, but that would be little more effective than the first announcement: as many analysts have explained, oil prices are influenced by global rather than local factors. , even a major oil-producing country like the United States. .
“Assuming China doesn’t experience a hard downturn, that Omicron actually becomes Omi-gone, and with OPEC+’s ability to increase production clearly limited, I see no reason why Brent can’t heading for $100 in Q1, possibly sooner,” OANDA senior market analyst Jeffrey Halley told Reuters last week.
If Brent heads towards $100, West Texas Intermediate won’t be far behind, even with rising US production. The problem, from Washington’s perspective, is that even with rising US production, global supply remains below demand, ironically because of OPEC, which Biden has personally advocated for increasing oil production. so that U.S. pump prices go down.
“OPEC+ remains committed to adding 400,000 bpd to the market each month, but our data suggests monthly additions are approaching 250,000 bpd,” RBC Capital Markets commodity strategist Mike Tran said in a note. , quoted by Reuters.
Many OPEC members are struggling with their higher production quotas due to technical issues, like Nigeria, or political factors, like Libya, which, to be fair, has been exempted from any production cuts. and can pump at will as long as the political situation in the country allows. Recent outages have taken around 500,000 bpd or more of its total output.
The strength of the upside potential for oil prices at this time is evident in the fact that even though Libyan production is rebounding, prices are not falling. The country’s oil minister said late last week that production had returned to 1.2 million bpd. Still, Brent crude was trading above $86 a barrel at the time of writing, with WTI trading above $84.
The reason is structural. The supply problem is not a temporary problem that can be solved quickly or easily. First, there’s OPEC’s limited spare capacity, which has been in decline for two years amid the pandemic. Secondly, there is the potentially more serious problem of underinvestment, this being not so much due to the pandemic as to the ESG trend which has made shareholders much more demanding on the environmental credentials of companies than on their money-making abilities.
Apparently, however, end consumers don’t care as much about environmental credentials as shareholders. They care about having fuel for their cars, which leads to a constant increase in demand. Even the International Energy Agency has had to reverse its calls for an immediate suspension of all investment in new oil and gas production and instead call for more investment. According to the IEA, global oil supply is at least 1 million bpd less than demand.
It’s a void that would be hard to fill, even if the entire US shale oil industry started drilling wells. First, because the shareholders would be unleashed. Second, because even in the shale zone, it takes a while to drill enough wells to make a difference in international prices, especially when few other producers have the capacity to do the same.
There is little left for the White House and other policymakers to do but sit back and wait to see how the oil price game plays out. It’s quite telling that OPEC doesn’t want Brent to hit $100, according to comments from Oman’s oil minister.
“We are very cautious at OPEC+, we will watch each month as we go,” Mohammed Al Rumhi told Bloomberg in an interview last week. “But so far I think 400,000 is good because demand is growing and we want to make sure the market doesn’t overheat. We don’t want to see $100 a barrel. The world is not ready for it.”
Yet if OPEC is not prepared to add enough production to keep the market well supplied, then the future of oil prices is also not in the hands of the cartel.
By Irina Slav for Oilprice.com
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