$ 100 of oil doesn’t seem likely

A woman was recently sentenced to four days in jail for approaching a bear to take a selfie: I guess she wasn’t at NYMEX, where bears seem to be absent these days. (Wait for laughs.) Social media is teeming with ever higher oil price predictions and the media proclaims a global energy crisis, while fears of energy-induced inflation pressurize central banks. In order not to miss the opportunity to intervene, experts like Thomas Friedman of the New York Times cite an English analyst warning that people will freeze this winter. (I guess he also predicts that people will sweat in the summer.)

Yes, natural gas prices are high in Europe and Asia, with the weather being the main culprit, which means they will almost certainly drop in the spring, if not sooner. And oil prices have climbed almost 100% since last year! When they were a little depressed for some reason that escapes me. Not to mention being -215% higher than April 20, 2020! (When the prices were negative.)

So, is the forecast of $ 100 a barrel for next year valid? Or simply the clickbait equivalent of Red Carpet Dress Fails investors! Well, yes and no. Fundamentals have, for the most part, tightened with world stocks seemingly at or below normal levels (I say apparently because there is little data for much of world oil stocks). US crude inventories have fallen sharply, but more recently due to the loss of more than 30 million barrels of production due to Hurricane Ida. About three-quarters of that was restored, and higher imports (thanks, Vlad) helped them recover. A little.

But as the figure above shows, Ida was just the icing on the OPEC + cake: the group’s planning and discipline has reduced overflowing stocks last spring to slightly below normal now. (Again, with allowances for poor data.) As a result, prices have “rallied” from around $ 40 last year to $ 80 now. But does that mean the bull market will persist?

The following figure is of crucial importance, showing that OPEC’s excess capacity is significantly higher than normal. The IEA estimates that OPEC, including the ‘+’, has 8.52 mb / d of spare capacity, although that includes 1.3 in Iran, the availability of which is questionable. Nonetheless, this means that only a few phone calls and a few valve turns are needed to restore market equilibrium or even drive inventories up again. Forecasts of $ 100 or more assume that OPEC + will make serious miscalculations or want higher prices.

While speculators gone mad could certainly send prices up to $ 100, they will only stay there if OPEC + decides to let them. Specifically, the main members – Iraq, Russia and Saudi Arabia – decide they prefer these higher prices. I seriously doubt it for several reasons. One is that Iraq and Russia almost certainly want to increase production: remember that Russia has already pressured the Saudis to increase quotas this year. Iraq is more difficult to predict: they would surely like to sell more oil but do not want to deter oil price rises.

The key then becomes Saudi Arabia. Energy Minister Salman is keenly aware of how the oil market collapsed when prices were too high in the early 1980s, and Saudi production fell by 75% as they served as a producer of support to OPEC. But OPEC as a whole has lost 50% of its market, so even if the Saudis don’t budge, they could lose significant market share in the long run.

My personal suspicion is that the recovery in US production combined with some economic weakness due to supply chain issues will lead to inventory moderation and lower prices. Otherwise, it seems likely that OPEC + will put some more oil on the market in November or at least push the market down. Prince Salman warned oil bears against complacency earlier this year. Perhaps he will do the same for the bulls.

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