A barrel of oil for 100 dollars?

Apr 19, 2018 3:10 PM|Marcin Lipka

“Almost every day, oil is getting more and more expensive. In only two weeks, Brent prices have risen by 10%, reaching the highest levels since November 2014. Should we be afraid that oil will break the level of 100 dollars per barrel and fuel will cost about 5.5-6.0 PLN per liter?” writes Marcin Lipka, Conotoxia Senior Analyst.

Marcin Lipka, główny analityk Cinkciarz.pl

There are many culprits of the higher prices. First of all, the restless geopolitical situation causes some investors to be afraid of supply disruptions from the Middle East. These problems would quickly translate into further increase in crude oil prices, as global reserves of this raw material have clearly fallen over the past few quarters and the so-called safety buffer has decreased.

Who is responsible for the rising prices?

International tensions concern not only the widely discussed problem of Syria. By May 12, President Trump must decide whether to extend the nuclear agreement with Iran. Since the lifting of sanctions in 2015, extraction from this country has increased by almost 40%. According to the economists surveyed by Bloomberg, Tehran may be forced to reduce oil production by as much as 800,000 barrels a day, if trade restrictions were restored. The chance of such a scenario is 50:50.

We cannot forget about the significant decline in production from Venezuela. This crisis-stricken country extracted 500,000 barrels a day, less than half a year ago. With global demand at the level of 100 million barrels a day, this does not seem much, but the situation may even worsen due to the chronic lack of investment in this sector and President Nicolas Maduro’s strong reluctance towards foreign capital.

An important element in the puzzle is also the fact that the main producers have closed the ranks and are planning long-term cooperation. Cartel Plus is a possible nickname for the ever closer cooperation between OPEC and Russia. Smart supply management by producers who advocate almost half of the global oil extraction potential may mean higher prices for consumers, especially when demand is strong.

The increase in consumption also raises prices

Consumer behavior has a significant impact on the price of oil. The global economic growth acceleration and a good economic situation of households may cause the annual demand for oil to grow by up to 1.5 million barrels a day (estimates from the IEA April report).

A good example of the strong growth in demand for this material was the data from the United States published on Wednesday. According to the latest American Energy Agency (EIA) report, the daily demand for unleaded petrol reached almost 10 million barrels. This is a historic record, even before the start of the holiday season, when the demand for fuel in the US reaches its highest levels.

Fortunately 100 USD is in the distance

Apart from fundamental events related to demand, supply and inventories, a lot of attention was attracted by unofficial information from Saudi Arabia. Bloomberg wrote about the Kingdom’s preferred price of 80 USD per barrel. Reuters, in turn, reported on the willingness to raise the price to 100 USD, citing three sources in the industry.

A return to the three-digit price of a barrel of oil sounds dramatic, but such a scenario is unlikely at the moment. And so, current prices cause very sharp increases in mining in the USA. Cartel Plus knows that geopolitical problems will not indefinitely support oil, and that rapid production growth in the US or Canada runs the risk of repeating the 2014-2016 scenario which is flooding the market with oil through excessive supply and price drops even below 30 USD per barrel. Willingness to keep prices around 100 USD would not make sense, even considering the intentions of selling parts of the world's largest oil and gas company, Saudi Aramco.

High oil prices, up to 80 dollars per barrel, or fuel at domestic petrol stations valued at 5 PLN per liter, may last for weeks or even months. However, the probability of price increases by a further 30-40% is unlikely, as it would ultimately hurt those who control the energy market to a large extent.

Apr 19, 2018 3:10 PM|Marcin Lipka

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