Should We Be Ready for $150 Dollar Oil ...Not Really

Should we be ready for $150 dollar Oil …
It was a fair call a few weeks ago. Oil trades at $94.81 dollars a barrel Brent Crude Basis as we write. West Texas WTI trades below $90 dollars. It’s a tight spread. Despite the forecasts of a slow down in world growth from the World Bank, the OECD and the IMF, demand for oil remains strong and looks set to continue for the rest of the year. Fears of a China slowdown hit prices this week.

The shortage of refining capacity is exacerbating retail fuel prices. Refinery capacity was hit during Covid. Capacity has not yet been replaced. Investment intentions are subdued. Oil companies are concerned about tight margins. They are not entirely sure about future demand patterns and the sustainability of higher prices. Investor pressures, with an ESG agenda, are inhibiting investment plans.

Supply Side Constraints Continue …
OPEC it is argued has less than 2 million barrels per day in spare capacity. In the USA, despite the surge in prices, the oil rig count remains well below historic levels.

The Baker Hughes US oil rig count was 601 last week as oil prices Brent Crude averaged $100 dollars. A strong recovery from the drop below 200 in 2020 but still well below the 800 count pre Covid, when prices averaged $70 per barrel. Go back ten years and $120 oil would bring 1400 rigs into action.

Material constraints and labour shortages are blamed for the tardy response. Investors are concerned about the ESG agenda and the vagaries of future returns. Principal producers are not entirely convinced about the sustainability of $100  plus oil into the short and medium term.

The Shock of War …
The OECD explained this week, “limiting Russia’s ability to finance the war In Ukraine, by an embargo on Russian oil exports, is essential for speeding up an end to the devastating conflict”. European economies are struggling to wean themselves off Russian fuel. Alternative energy sources may not be so easy to ramp up quickly. There is a risk of higher prices or even shortages. It is argued.

The U.S. Energy Information Administration estimates that 2 million bpd could be lost as Russia winds down production. This is a greater amount it is suggested, than new production in the USA and OPEC may be able to cover.

The Biden administration is keen to ease prices pressures at the pumps. Stocks have been released from the U.S. Strategic Petroleum Reserve, with plans for further releases in the Autumn. Overtures to OPEC have been made. The Saudis have agreed to a modest boost to output in July and August.

Traders are unconvinced. OPEC will be keen to harvest inflated margins as long as demand destruction doesn’t follow from the price hikes.

The U.S. EIA Short term energy outlook (June) expects the Brent Crude price to average $108 dollar per barrel in the second half of 2022 falling to $97 dollars in 2023. For the moment $150 dollar oil may be just a traders dream.  $20 dollar oil in April 2020, a long distant memory. Our money is on $95 dollar Brent Crude for now.