Oil & Energy
Cure For High Oil Prices Might Be Higher Oil Prices
Oil producers have had a great year with oil prices rallying by as much as 20% in 2022 alone.
Higher oil prices could incentivize upstream investments and help push more supply into the market.
“Historically, markets led higher by tightening product and crude inventories are difficult to solve absent a demand destruction event or a supply surge, neither of which appears to be on the horizon.”
Fundamentals and geopolitics have pushed oil prices rallying by 20 percent so far this year to levels last seen in the autumn of 2014. The price at over $90 a barrel is up by more than 60 percent from this time last year, and many analysts say that $100 oil is now a matter of when, not if.
Oil majors and oil-producing countries part of the OPEC+ alliance have seen the benefits of rallying oil prices with huge cash flows and profits, and government oil revenues, respectively.
While these handsome benefits of the high oil prices are undoubtedly positive for the finances of the supermajors, OPEC members, and Russia, the market is already wondering at what price point demand destruction will kick in.
At this point, considering the very tight market right now, persistently high oil prices at over $90—and possibly $100 a barrel—could be one of the few ‘cures’ for high oil prices in the medium term. In the longer term, $90, or $100, oil could incentivize more upstream investments, which have been woefully insufficient over the past two years, compared to the now rebounding post-COVID oil demand.
It could be $100 oil that would ‘cure’ high oil prices. Yet, it’s possible that demand growth will slow down—because of the high oil prices—before producers commit more investments in supply.
“The only way to balance this market over the medium term remains high oil prices to slow demand growth,” analysts at Energy Aspects wrote in a note to clients this week cited byBloomberg.
Bringing more supply, on the other hand, is now more challenging than before the pandemic. ESG issues and the energy transition for the international majors, as well as the new-found and still-largely-holding capital discipline of U.S. shale producers, combine with supply chain bottlenecks, labor shortages, and cost inflation. $100 oil could unleash a lot more U.S. oil production, in theory, but supply chain constraints and record-high frac sand prices are likely to temper growth, analysts at Rystad Energy say.
Global investments in supply rose in 2021 compared to 2020 and are expected to rise this year as well, but they will still lag pre-pandemic levels, all forecasters say. The oil majors have not boosted exploration investments too much, while U.S. shale basically needs to raise 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 percent, compared with nearly 40 percent in the mid-2010s.
Unlike oil majors, national oil companies, especially ADNOC of Abu Dhabi and Saudi Aramco, are investing more in new supply as they each look to raise their respective production capacities by 1 million barrels per day (bpd) by the end of this decade.
In the near term, however, the market fundamentals point that supply is lagging behind the rebound in demand, pushing oil prices higher, together with the threat of a possible disruption in the Russian oil supply due to the Ukraine crisis.
Analysts say that the short-term cure for high oil prices is for them to reach the point at which they will start to weigh on demand. It seems that we are not there yet.
During previous upcycles, $80 seemed to be the point at which major oil-consuming countries started to plead with producers for more supply. We are now well past this point, and as pleas with OPEC+ to pump more oil continue, the alliance is not changing course – for now – and the few producers with spare capacity are not compensating for a massive overall under-production at those that lack that capacity.
Oil could be set for $100 and even more later this year, analysts told CNBC this week.
“We could be early, but the major cornerstone of our thesis over the next year, or longer, assuming the macro economy holds, is that the oil cycle will price higher until it finds a level of demand destruction,” Michael Tran, commodity and digital intelligence strategist at RBC Capital Markets, wrote in a note carried by CNBC.
“Historically, markets led higher by tightening product and crude inventories are difficult to solve absent a demand destruction event or a supply surge, neither of which appears to be on the horizon,” according to RBC Capital Markets.
By: Michael Kern
Kern reports for Oilprice.com.
The Federal Government has expressed optimism in attracting more investments by International Oil Companies (IOCs) into Nigeria to foster growth and sustainability in the energy sector.
This is as some IOCs, particularly Shell and TotalEnergies, had announced plans to divest some of their assets from the country.
Recall that Shell in January, 2024 had said it would sell the Shell Petroleum Development Company of Nigeria Limited (SPDC) to Renaissance.
According to the Minister of State for Petroleum Resources (Oil), Heineken Lokpobiri, increasing investments by IOCs as well as boosting crude production to enhancing Nigeria’s position as a leading player in the global energy market, are the key objectives of the Government.
Lokpobiri emphasized the Ministry’s willingness to collaborate with State Governments, particularly Bayelsa State, in advancing energy sector transformation efforts.
The Minister, who stressed the importance of cooperation in achieving shared goals said, “we are open to partnerships with Bayelsa State Government for mutual progress”.
In response to Governor Douye Diri’s appeal for Ministry intervention in restoring the Atala Oil Field belonging to Bayelsa State, the Minister assured prompt attention to the matter.
He said, “We will look into the issue promptly and ensure fairness and equity in addressing state concerns”.
Lokpobiri explained that the Bayelsa State Governor, Douyi Diri’s visit reaffirmed the commitment of both the Federal and State Government’s readiness to work together towards a sustainable, inclusive, and prosperous energy future for Nigeria.
While speaking, Governor Diri commended the Minister for his remarkable performance in revitalisng the nation’s energy sector.
The Federal Government has assured investors in the nation’s gas sector of the security and safety of their investments.
Minister of State for Petroleum Resources (Gas), Ekperikpe Ekpo, gave the assurance while hosting top officials of Shanghai Huayi Energy Chemical Company Group of China (HUAYI) and China Road and Bridge Corporation, who are strategic investors in Brass Methanol and Gas Hub Project in Bayelsa State.
The Minister in a statement stressed that Nigeria was open for investments and investors, insisting that present and prospective foreign investors have no need to entertain fear on the safety of their investment.
Describing the Brass project as one critical project of the President Bola Tinubu-led administration, Ekpo said.
“The Federal Government is committed to developing Nigeria’s gas reserves through projects such as the Brass Methanol project, which presents an opportunity for the diversification of Nigeria’s economy.
“It is for this and other reasons that the project has been accorded the significant concessions (or support) that it enjoys from the government.
“Let me, therefore, assure you of the strong commitment of our government to the security and safety of yours and other investments as we have continually done for similar Chinese investments in Nigeria through the years”, he added.
Ekpo further tasked investors and contractors working on the project to double their efforts, saying, “I want to see this project running for the good of Nigeria and its investors”.
Earlier in his speech, Leader of the Chinese delegation, Mr Zheng Bi Jun, said the visit to the country was to carry out feasibility studies for investments in methanol projects.
On his part, the Managing Director of Brass Fertiliser and Petrochemical Ltd, Mr Ben Okoye, expressed optimism in partnering with genuine investors on the project.
Crude oil prices recently logged their second monthly gain in a row as OPEC+ extended their supply curb deal until the end of Q2 2024.
The gains have been considerable, with WTI adding about $7 per barrel over the month of February.
Yet a lot of analysts remain bearish about the commodity’s prospects. In fact, they believe that there is enough oil supply globally to keep Brent around $81 this year and WTI at some $76.50, according to a Reuters poll.
Yet, like last year in U.S. shale showed, there is always the possibility of a major surprise.
According to the respondents in that poll, what’s keeping prices tame is, first, the fact that the Red Sea crisis has not yet affected oil shipments in the region, thanks to alternative routes.
The second reason cited by the analysts is OPEC+ spare capacity, which has increased, thanks to the cuts.
“Spare capacity has reached a multi-year high, which will keep overall market sentiment under pressure over the coming months”, senior analyst, Florian Grunberger, told Reuters.
The perception of ample spare capacity is definitely one factor keeping traders and analysts bearish as they assume this capacity would be put into operation as soon as the market needs it. This may well be an incorrect assumption.
Saudi Arabia and OPEC have given multiple signs that they would only release more production if prices are to their liking, and if cuts are getting extended, then current prices are not to OPEC’s liking yet.
There is more, too. The Saudis, which are cutting the most and have the greatest spare capacity at around 3 million barrels daily right now, are acutely aware that the moment they release additional supply, prices will plunge.
Therefore, the chance of Saudi cuts being reversed anytime soon is pretty slim.
Then there is the U.S. oil production factor. Last year, analysts expected modest output additions from the shale patch because the rig count remained consistently lower than what it was during the strongest shale boom years.
That assumption proved wrong as drillers made substantial gains in well productivity that pushed total production to yet another record.
Perhaps a bit oddly, analysts are once again making a bold assumption for this year: that the productivity gains will continue at the same rate this year as well.
The Energy Information Administration disagrees. In its latest Short-Term Energy Outlook, the authority estimated that U.S. oil output had reached a record high of 13.3 million barrels daily that in January fell to 12.6 million bpd due to harsh winter weather.
For the rest of the year, however, the EIA has forecast a production level remaining around the December record, which will only be broken in February 2025.
Oil demand, meanwhile, will be growing. Wood Mackenzie recently predicted 2024 demand growth at 1.9 million barrels daily.
OPEC sees this year’s demand growth at 2.25 million barrels daily. The IEA is, as usual, the most modest in its expectations, seeing 2024 demand for oil grow by 1.2 million bpd.
With OPEC+ keeping a lid on production and U.S. production remaining largely flat on 2023, if the EIA is correct, a tightening of the supply situation is only a matter of time. Indeed, some are predicting that already.
Natural resource-focused investors Goehring and Rozencwajg recently released their latest market outlook, in which they warned that the oil market may already be in a structural deficit, to manifest later this year.
They also noted a change in the methodology that the EIA uses to estimate oil production, which may well have led to a serious overestimation of production growth.
The discrepancy between actual and reported production, Goehring and Rozencwajg said, could be so significant that the EIA may be estimating growth where there’s a production decline.
So, on the one hand, some pretty important assumptions are being made about demand, namely, that it will grow more slowly this year than it did last year.
This assumption is based on another one, by the way, and this is the assumption that EV sales will rise as strongly as they did last year, when they failed to make a dent in oil demand growth, and kill some oil demand.
On the other hand, there is the assumption that U.S. drillers will keep drilling like they did last year. What would motivate such a development is unclear, besides the expectation that Europe will take in even more U.S. crude this year than it already is.
This is a much safer assumption than the one about demand, by the way. And yet, there are indications from the U.S. oil industry that there will be no pumping at will this year. There will be more production discipline.
Predicting oil prices accurately, even over the shortest of periods, is as safe as flipping a coin. With the number of variables at play at any moment, accurate predictions are usually little more than a fluke, especially when perceptions play such an outsized role in price movements.
One thing is for sure, though. There may be surprises this year in oil.
lrina Slav
Slav writes for Oilprice.com.
