Fundamentals and geopolitics have pushed oil prices up 20% so far this year, to levels not seen in the fall of 2014. The price above $90 a barrel is up more than 60% compared to the same time last year, and many analysts say $100 Oil is now a matter of when, not if.
Oil majors and oil-producing countries that are part of the OPEC+ alliance have seen the benefits of higher oil prices with huge cash flow and profits, and government oil revenues, respectively.
While these handsome benefits from high oil prices are undoubtedly positive for the finances of the supermajors, OPEC members and Russia, the market is already wondering at what price the demand destruction will kick in.
At this stage, given the very tight market right now, persistently high oil prices above $90 – and possibly $100 a barrel – could be one of the few “cures” to high oil prices in the medium term. Longer term, $90 or $100 oil could spur more upstream investment, which has been woefully insufficient over the past couple of years, relative to post-COVID oil demand now rebounding.
It could be $100 oil that would “cure” high oil prices. Still, demand growth may slow, due to high oil prices, before producers invest more in supply.
“The only way to balance this market over the medium term is still high oil prices to slow demand growth,” Energy Aspects analysts wrote in a note to clients this week cited by Bloomberg.
Bringing in more supply, on the other hand, is now more difficult than before the pandemic. ESG issues and the energy transition for the international majors, as well as the rediscovered capital discipline that still prevails among American shale producers, combine with supply chain bottlenecks, labor shortages and cost inflation. $100 oil could unleash significantly more U.S. oil production, in theory, but supply chain constraints and record frac sand prices are likely to temper growth, Rystad analysts say Energy to say.
Global supply-side investment increased in 2021 compared to 2020 and is also expected to increase this year, but it will still lag behind pre-pandemic levels, according to all forecasters. The oil majors haven’t boosted exploration investment too much, while the US shale essentially needs to increase investment just to keep production flat. According to the International Energy Agency (IEA), the oil majors’ share of overall upstream spending is now at 25 percentcompared to nearly 40% in the mid-2010s.
Unlike the oil majors, national oil companies, particularly Abu Dhabi’s ADNOC and Saudi Aramco, are investing more in new supplies as they each seek to increase their respective production capacities by 1 million barrels per day ( bpd) by the end of this decade.
In the short term, however, market fundamentals indicate that supply is lagging behind the rebound in demand, pushing oil prices higher, along with the threat of possible disruption in the supply of Russian oil due to the Ukrainian crisis.
Analysts say the short-term cure for high oil prices is for them to reach the point where they will start to weigh on demand. It looks like we’re not there yet.
In previous bull cycles, $80 seemed to be the point at which major oil consuming nations began to plead with producers for more supply. We are now well past that point, and as pleads with OPEC+ pumping more oil continues, the alliance is not changing course – for now – and the few producers with spare capacity are not compensating for a massive overall underproduction in those without this capacity.
Oil could be pegged at $100 and even higher later this year, analysts said CNBC this week.
“We could be ahead, but the main cornerstone of our thesis over the next year or more, assuming the macro economy holds up, is that the oil cycle will rise until it finds a level. of demand destruction,” Michael Tran, commodities and digital intelligence strategist at RBC Capital Markets, wrote in a note carried by CNBC.
“Historically, markets driven higher by tight commodity and crude inventories are difficult to resolve absent a demand destruction event or a supply surge, which do not seem to be on the horizon,” according to RBC Capital Markets.
By Michael Kern for Oilprice.com
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