After the price of West Texas Intermediate (WTI) recently crossed $ 80 a barrel, Russian President Vladimir Putin was asked if he could reach $ 100. He replied: “It is quite possible.” Given Russia’s dependence on revenues from its oil exports, he was probably smiling as he said so. The price of WTI has not gone above $ 100 since 2014, but OPEC was a big reason that oil prices soared above $ 100, and they were a big reason why the price of oil. oil fell below $ 100.
One of the main reasons the price of WTI initially eclipsed $ 100 a barrel in 2008 was that OPEC had been reluctant to significantly increase production in previous years. From 2004 to 2007, OPEC only increased its oil production by 1.2 million barrels per day (BPD), assuring other countries that markets were adequately supplied.
Meanwhile, global demand for oil has grown by about 3.2 million barrels per day during these years. Non-OPEC production was stable during these years, which started to raise concerns about future oil supplies.
The peak oil panic was a factor that ultimately pushed the price of oil close to $ 150 a barrel in the summer of 2008. There was concern that there simply wasn’t enough oil for everyone.
But, another development was occurring simultaneously that would eventually add important new supplies to the market – and force OPEC to respond.
U.S. oil production increased in 2008, and over the next six years, it added about 5 million barrels per day of oil production to markets. This was a new market threat to OPEC coming from an unexpected direction. The United States had been a major importer of oil before the shale oil boom and had experienced a steady decline in oil production since 1970.
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OPEC first tried to manage this threat by cutting its own production to keep markets balanced – and to keep oil prices above $ 100. But US production kept increasing and, eventually, the dam broke in 2014. Oil prices fell below $ 100, and soon after, OPEC engaged in a price war to regain market share. The group quickly increased its production, which caused the price of oil to drop.
Between summer 2014 and January 2015, the price of WTI was halved. A year later, it would drop below $ 30, and some experts said we would never see $ 100 worth of oil again.
Predicting oil prices is a fool’s game, which requires forecasting OPEC actions. They suffered tremendously during the price war, but they did not bankrupt the American shale oil industry. Oil production in the United States declined in 2016, but resumed growth in 2017 with the recovery in oil prices.
OPEC again reverted to its market-balancing strategy with production cuts, and until the Covid-19 pandemic crushed global demand for oil, which was working to steadily increase oil prices.
Then the pandemic took some of the production that still has not recovered offline – especially in the United States. Now that the demand for oil has returned to near pre-Covid levels, both supply and demand have tightened considerably – just like in 2007. As I noted in the previous article, the number of US rigs is increasing in response to rising oil prices, but it will take some time to translate into higher oil production.
Meanwhile, the price of oil continues to rise. How high will it go? Over the next few months, it will depend on what OPEC decides to do.
By Robert Rapier via www.rrapier.com
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