Brent crude futures prices have risen 25 percent since the end of Last November, and as of press time, they have exceeded $88 a barrel. Hours before the IEA released a more bullish outlook, the price of crude oil in the London market rose above $89 a barrel to a seven-year high. Previously, WTI crude oil rose to $86.16 at one point, also hitting a new 7-year high.
On January 19, the International Energy Agency (IEA) released its monthly crude oil market report. The IEA said the global oil market looked more tense than previously thought, with the latest coronavirus strain surprisingly having little impact on demand, while the supply side remained constrained by disruptions.
Omicron's impact is limited and demand remains strong
At present, global oil demand is strong, and goods in the spot market are being snapped up at a sharply rising premium; This is mainly due to the relatively mild toxicity of Omicron, high vaccination rates in many developed countries, and the general reluctance of many governments to impose a harsh lockdown, which means that there will be no major blow to oil consumption.
The IEA raised its global daily oil demand forecast for 2021 and 2022 by 200,000 barrels. Daily consumption will increase by 5.5 million barrels and 3.3 million barrels, respectively. The IEA noted that while another wave of record highs in the number of confirmed cases has been created, this spike in confirmed cases has had a much smaller impact on oil demand. There is a global diesel shortage, and even as long-haul air travel begins to recover, aviation fuel demand has also begun to pick up strongly.
OPEC production growth can not keep up, supply is still in short supply
As demand recovers, the supply situation becomes more fragile. In its monthly report, the IEA noted that the supply of oil surpluses in global markets is decreasing this year, and oil demand is expected to reach 99.7 million bpd before the pandemic. At the same time, OPEC+ is struggling to resume production increases, and oil producers in other regions are experiencing a series of supply disruptions, reducing the surplus of spare capacity; Oil production is limited.
OPEC+ has officially resumed a production increase of 400,000 barrels per month, but in reality, the organization has not managed to get close to that goal. The agency said OPEC+ has been resuming production that was halted during the outbreak, achieving only 60 percent of the planned increase in production in December.
OPEC added only 90,000 bpd of production in December last year, with African member states particularly struggling to increase production, with cuts in libya and Nigeria offsetting Saudi Arabia's increased supply. Angola, Malaysia and even Russia are struggling with capacity constraints; Russia says it could only meet about half of the originally planned increase in production in the next six months.
The IEA said the organization could reduce its spare capacity from the current roughly 5 million barrels per day to 3 million barrels per day as OPEC+ tries to restore its remaining unfulfilled output. Even if production in the U.S., Canada and Brazil increases significantly, it could leave the market vulnerable to price fluctuations, the IEA said.
OPEC's supply disruption intensified on Tuesday, largely because a major pipeline from Iraq to Turkey was suspended due to an explosion; This is a reminder that spare capacity is important for maintaining a stable oil supply.
The IEA believes that sources of supply in other emergencies have also decreased, with fuel inventories in developed countries falling by 6.1 million barrels last November to a seven-year low.
According to oil analysis firm Kayrros, global crude inventories eventually fell to pre-pandemic levels in early January, led by a sharp drop in U.S. crude inventories, which are at their lowest level since late 2018. Singapore's distillate stocks have fallen to their lowest levels since 2013. The backdrop of tighter supply has pushed the oil market structure further into spot premiums, i.e. spot prices are higher than futures prices, further reducing the incentive to raise inventories.
Amrita Sen, chief oil analyst at industry consultancy Energy Aspects, pointed out that at present, there is no buffer on the supply side of the crude oil market, making it more vulnerable to the impact of rising oil prices. Sen believes that when there is an inventory buffer, small shortages like those encountered in December and January are less important; But there is currently no such supply buffer in the market.
Although U.S. oil production has been increasing, it is still not enough to cool the oil price rally. Last December, supply in the Permian Basin rose to record levels. Spanning Texas and New Mexico, the basin is the region with the highest shale oil production in the United States. Lower production costs in the Permian Basin make it a place of choice for drilling companies eager to profit from rising oil prices, but higher overhead and supply chain chaos in other regions have so far dampened accelerated growth in production activity.
According to Baker Hughes, the number of oil rigs in use in the U.S. has rebounded from less than 200 in the second half of 2020 to nearly 500, but is still more than 200 below the Level in March 2020.
It is only a matter of time before oil prices break through the 100
Clearly, high demand, fading omicron concerns, and OPEC+'s inability to boost production have all supported a sharp rise in oil prices.
Some market participants now believe that the question now is when oil prices will reach triple digits, not whether they will reach triple digits, something that has not been seen since 2014.
Goldman Sachs said this week it expects oil prices to reach $100 a barrel in the third quarter. On Wednesday, premiums for call options that were executed at $100/b also soared to record highs.
Reaching this level would exacerbate already considerable inflationary pressures on the global economy, which would be a headache for many governments and central banks that are trying to spur a recovery and guard against inflation spikes.
The problem of short supply appears to be the main factor driving oil prices toward the $100-a-barrel mark. However, this is certainly not a fait accompli; Iran's supply remains an uncertain factor, and if the protracted nuclear talks bear fruit, it will pave the way for Iran's official resumption of crude oil exports.
In addition, as oil prices rise, so do U.S. energy companies' stock prices, and an important question is whether shale oil extraction companies will use the extra money this year to boost production; that question is also crucial for whether crude oil prices can reach triple digits.