In its February Short Term Energy Outlook (STEO), the EIA forecasts this month’s global oil consumption at 96.7 million barrels per day (mbpd). Oil inventories are much lower, however, at only 93.6 MBpd, with the difference of 3.1 MBpd necessarily being drawn from crude oil and refined inventories. By historical standards, a sustained draw of 3 mbpd is large, and we expect prices to rise under such circumstances.
According to the EIA, demand continues to recover at a good pace in the middle of the year, with global oil consumption for July at 98.2 mbpd (but still about 4 mbpd below ‘normal’). This growing demand is supplied materially by two sources, Brazil and OPEC. We could accept Brazil’s crude oil production growth as a given, putting the timing off by maybe a month or two. Instead, the central question is OPEC’s intentions.
The EIA uses a volume (or demand) driven model, meaning that OPEC will passively increase production to meet demand, thereby keeping oil prices low. But why would OPEC do this? If OPEC just maintains current production levels, the world would be 3.5 mbpd short by mid-year. A 3.5 mbpd deficit – 3.6% of global consumption – is a lot. It would quickly drain remaining surplus supplies, leaving only oil prices to mediate between supply and demand, just as the global economy is showing both strength and dynamism as the pandemic ends. In other words, consumers will be willing to compete for the available barrels of oil in the coming months, and that should drive up oil prices significantly.
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That’s the “$ 100 / barrel” theorem.
A few important notes and caveats. In many cases, operators have to commit to producing barrels before knowing what the price will be. In this case, OPEC can raise prices and add barrels at its discretion. This gives OPEC a lot of control and flexibility over oil prices. Sure, higher oil prices are better, but more barrels could be added in the fairly short term if OPEC thinks the market is overheating. This should encourage OPEC to test increasingly higher price levels.
And of course politics in the Middle East is complicated. The complex interplay of Iran, Saudi Arabia and the United States can lead to unexpected results. If Iran were to be raised more, it could likely bring the US back in some sort of agreement in the short term, freeing Tehran to increase oil exports and lower oil prices. On the other hand, the Houthi attack on Saudi oil facilities at the Ras Tanura loading port may push the Saudis back in the US embrace and motivate the Kingdom to keep oil prices lower to win favor with the Biden government.
It is difficult to know where the balance will end. Nevertheless, this is OPEC’s best chance of making real money in the short to medium term. It would be foolish to pass up the opportunity.
By Steven Kopits of Princeton Energy Advisors via Zerohedge.com
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