Well, it wasn’t terribly difficult to write the copy on Monday.
OPEC, in its infinite wisdom, opted to stick with the program where that means deciding against the kind of output increase that might help arrest an increasingly alarming price spike that threatens to exacerbate inflation at a delicate juncture for the global economy.
In ratifying a planned 400,000 barrel/day hike for November, the cartel and allied producers effectively wrong-footed a market that was looking (hoping?) for a temporary hike above and beyond the scheduled increase. Oil surged to the highest since 2014 (figure below).
We’re a long way from negative $36.
This comes amid a growing chorus of calls for triple-digit crude. Last week, Brent topped $80 and analysts rushed to adjust forecasts.
“The current global oil supply-demand deficit is larger than we expected, with the recovery in global demand from the Delta impact even faster than our above consensus forecast and with global supply remaining short of our below consensus forecasts,” Goldman’s Damien Courvalin and Jeff Currie wrote, in the course of raising their year-end target to $90. In the same note, Goldman suggested the stage was set for a “structural bull market.”
Read more: Calls Grow For ‘Structural Bull Market’ In Surging Crude
You’d be forgiven for questioning OPEC’s judgment. For one thing, it’s obvious that demand is set to benefit from the worsening natural gas crisis. Aramco acknowledged as much. Amin Nasser said Monday the increase in demand outstrips the planned production increase.
Beyond that, though, you’ll recall that Riyadh and Moscow stumbled into what might fairly be described as one of the most ill-timed price wars in history on the eve of the pandemic — as if the writing wasn’t on the wall. That contributed to crude’s epic collapse. The Saudis would eventually get credit for helping rescue the market, but it was a kind of “the only people who can fix this are the people who broke it” dynamic. There’s no guarantee the cartel won’t now err on the other side, where that means accidentally igniting a price spiral.
For now, OPEC seems more worried about another collapse. “There are calls for more of a production increase [but] we are scared of the fourth wave of corona [and] no one wants to make any big moves,” a source told Reuters before Monday’s ministerial talks.
Riyadh is raking in the most money from crude (on a monthly basis) since late 2018, and it’s likely the Kingdom will come under more pressure from Washington should prices continue to rise. One analyst on Monday said the Saudis are “keen to cap the upside and downside of the oil market, if needed,” but as we saw in 2020, sometimes exercising control is easier said than done, even when you operate a cartel.
Sure, Aramco looks to have the market on a tight leash right now, but the important point is that given the perilous macro setup, a miscalculation could trigger an outright crisis. Just ask BofA’s Francisco Blanch, who last week penned a note that carried the ominous title, “A storm away from the next macro hurricane.”
“Like in the 1970s or in 2008, oil could once again become the destabilizing factor that causes the next macro crisis,” Blanch warned, adding that,
Looking back at an analysis that we first put together in 2008, we note that energy as a share of GDP has risen to 5.6% so far, still far from the critical level of 8.8% observed in 2008. Yet we note that (1) gas to oil substitution could reach 1 to 2mn b/d if gas prices keep rising, (2) a cold winter could add 500 thousand b/d of oil demand, and (3) increased air traffic as the US reopens could add 300-500 thousand b/d of incremental demand in 1Q22. If all these factors come together, oil prices could spike and lead to a second round of inflationary pressures around the world. Put differently, we may just be one storm away from the next macro hurricane.
Blanch’s full note is 18 pages long, but you get the point. That single paragraph neatly summarizes the state of the market.
OPEC is playing with fire and, generally speaking, that’s not advisable. Especially when your business is dealing in flammable liquids.
Come on. Rising prices was the whole point of OPEC in the first place. Besides some frackers and other producers will be happy to tag along for increased profits. Britain can probably use the money to pay higher wages to truckers so they can actually haul in the gas now missing from their retailers.
High gas prices are a boon to us shale operations. We may see a strong resurgence in US drilling if gas prices hold up/increase.
Fossil fuels wrecking havoc once again. This will be an ongoing problem for the major energy source that is controlled by a few big players and foresees it’s ultimate demise in the not too distant future. Might as well milk that baby while they can. Another good reason to find new energy sources that can be generated by as many people as possible and not kept in a few greedy hands.