Oil prices have reached a 7 year high and almost nearing $100 mark – the psychological barrier. The bullish sentiments have gained further impetus due to falling inventory levels, a spike in demand, soaring inflation and also the ensuing energy crisis, concerns regarding a supply crunch and falling spare capacity. Geopolitical tensions, in the form of Russia-Ukraine has, has further advanced the prices making the recurrence of a triple digit oil prices possible again – for the first time since 2014.
I have maintained that the possibility of oil touching $100 remains thin but it becomes probable in the presence of any flare-up in geopolitical flashpoints. However, the question, we should be asking, is not whether we will enter $100 but how long will the prices stay there? Traders and analysts have started to call for $140 – $150 oil by summer. Is this possible? I, once again, have an utterly opposite point of view. One of the main reasons for this exaggerated bullishness is the fact that demand will outstrip supply and prices will surge further. However, according to different estimates, the notion of an undersupplied oil market is factually incorrect. For instance, as per one estimate by Rory Johnston, taking an average of outlooks from EIA, IEA and OPEC, there will be a 500,000 bpd oversupply of oil (per EIA) and a balanced market, per OPEC. None of the outlooks call for a supply crunch. EIA even predicts that markets will add 1.4 mbpd of oil in 2022 and Russian production will hit the highest.
The other factor is that Shale production will also surge. Drillers have tried to maintain financial discipline in the face of rising prices but many are giving up. For instance, Permian output is expected to grow by 71,000 bpd reaching a total of 5.205 mbpd in March 2022. There has been a significant reduction in Drilled But Uncompleted (DUCs) wells, that fell from 7449 in January 2021 to 4466 in January 2022. Overall Shale production, per EIA, is expected to add 190,000 bpd and touching 8.7 mbpd in 2022. Ed Morse, head of commodity analysis of Citi’s, is even more bearish and notes that U.S. shale will add 800,000 bpd in 2022 and 1 million in 2023 with the total output reaching 13.9 mbpd. These developments can cause a serious shift in consumer sentiment across the board. Furthermore, any progress in the U.S. – Iran deal can also reduce down the prices of oil as the very news will be considered very bearish. It is important to note that in real terms, Iran is already exporting its barrels into the markets but the news announcement will have the impact of a change in narrative (regarding paucity of oil).
On the other hand, Russia has hinted towards its inclination for a diplomatic resolution of the current crisis as highlighted by both the foreign minister of Russia and Putin himself. Some of the troops have also been called back after a build of more than 100,000 soldiers near the Ukrainian borders. As the tensions will start to diffuse, the markets will shed further dollars in terms of oil prices.
While it is a contrarian view, I continue to believe that prices are exaggerated at this point and should fall back to, at least, lower $80s. But of course only time will tell. So far, expect wild swings in the markets as guided by the winds of developments from Russian-Ukrainian border.
