OPEC+ is considering an increase in oil production as the global market tightens and prices rise. The deliberations come as a growing number of energy analysts issue bullish forecasts, predicting triple-digit prices in short order.
Data released by the EIA on June 23, which showed a huge drop in oil inventories, added even more momentum to the narrative that the oil market was growing uncomfortably tight. But even as analysts grow more confident in their sky-high oil price predictions, the pathway to $100 oil is riddled with uncertainties.
OPEC+ to add more oil
OPEC and its coalition partners are already discussing an increase in oil production ahead of their scheduled meeting, according to Reuters and the Wall Street Journal, a sign that at least some members of the group think oil prices are rising too high. Oil prices recently high their highest levels in two years.
Press reports suggest they may agree to a 0.5-million-barrel-per-day (Mb/d) increase when they meet at on July 1, an increase that would begin in August.
The potential move comes after a flurry of new forecasts from prominent oil watchers and investment banks, which call for prices that would have been unthinkable until only very recently.
“People ask me what is our favorite commodity – oil, oil and more oil.”
“This market is really bullish. People ask me what is our favorite commodity – oil, oil and more oil,” Jeff Currie, Goldman Sachs global head of commodities research, said on Bloomberg TV on June 22. “Demand is surging right now. We estimate it at 97 million barrels per day. That’s up from 95 just, literally, weeks ago.”
He added: “You put that type of demand growth against a nearly inelastic supply curve outside of OPEC…we see a lot of upside risk over the next several weeks.” Currie said that while OPEC+ may add another 0.5 Mb/d in August, the oil market will still be in a deficit until later this year. Goldman Sachs predicts an average Brent price of $80 per barrel for the third quarter.
Other analysts echo the sentiment. Bank of America Merrill Lynch published a June 20 forecast that said Brent could “briefly” hit $100 per barrel next year. The bank said that rising mobility as the world emerges from the pandemic, combined with supply-side restraint due to climate concerns from governments and ESG pressure on drillers by investors. “In short, demand is poised to bounce back and supply may not fully keep up, placing OPEC in control of the oil market in 2022,” Bank of America said.
Bank of America said oil could touch $100.
That could leave the market in a supply deficit well into 2022. While Bank of America said oil could touch $100, it predicts an average of $75 for next year.
Trafigura, one of the world’s largest commodity traders, is even more fervent in the high-price scenario. “Eventually you are going to be in a situation where demand has not only recovered but is stronger than it was, and you don’t have that capacity you need,” Saad Rahim, Trafigura’s global chief economist, said Tuesday in an interview with Bloomberg Television. Rahimi said prices could hit $100 in 2022 and could potentially exceed $100 within 18 months. The price increase could happen “gradually and then suddenly,” Rahim said.
But the cycle swings back
Oil analysts are falling over each other to issue bullish forecasts at the moment, but the enthusiasm for higher prices comes with a litany of caveats.
U.S. shale drillers are focusing on boosting returns to shareholders – and indeed they are expected to collectively post positive cash flow for essentially the first time in 2021 – but higher prices could tempt them to return to their old spending ways. More drilling and more production would undercut the triple-digit pricing narrative. The same could be true of other producers around the world, although the ability to respond quickly is more limited outside of shale.
The U.S.-Iran negotiations are also making progress, and Iran could bring some sanctioned supply back onto the market later this year.
Meanwhile, OPEC+ still has several million barrels per day of latent spare capacity sitting on the sidelines that it can call on.
On the demand side, the pandemic is not over.
On the demand side, the pandemic is not over. In fact, the new Delta variant is more transmissible and is spreading quickly. “The oil price is trending up despite what should be some show-stopping news out of Russia, where the third wave of Covid-19, which appears to mostly be driven by the Indian Delta variant, has brought cases and deaths in the capital city of Moscow to all-time highs,” Louise Dickson, oil market analyst at Rystad Energy, said in a statement. “The human tragedy is already apparent, and even those vaccinated with Sputnik are falling prey to the Delta variant, meaning even a ramp-up in the vaccination effort may not be able to fully deflect the third wave of cases.”
Dickson added: “The lesson here is that while the oil demand impact in Russia may not be material, a repeat of a severe outbreak of the Delta variant in a country with a low vaccination rate and worse health infrastructure than Russia could trigger more downside risk to oil prices in the near-term.
Another pitfall for oil prices is potential monetary tightening from the U.S. Federal Reserve. The Fed spooked financial markets on June 16 when it signaled that interest rate hikes may occur sooner than expected.
Finally, and perhaps most importantly for the medium- and long-term, the energy transition continues to unfold and the consumers are no longer captive to oil markets. They have alternatives. Renewable energy and electric vehicles are competitive and, in many cases, cheaper than fossil fuels, a dynamic that will only become more pronounced going forward. The global economy won’t countenance triple-digit oil prices in the same way it did a decade ago.
There’s little doubt that the oil market is at its tightest point in quite a while. But that is no guarantee that prices will return to $100 per barrel, and even if that does occur, the odds that prices would stay above that threshold for any sustained period of time are even more remote.