The already strained energy supply and demand relationship is exacerbated by the dire situation in Ukraine, international oil prices continue to hit new highs since 2014 this week, and Brent crude is just one step away from the psychological mark of $100. Energy prices are creating huge price pressures on consumer countries and are also bogging central bank policy choices.
Tamas Varga, senior market analyst at crude oil broker PVM Oil Associates, said in an interview with First Financial Reporter that it is only a matter of time before the oil price of $100 per barrel is only a matter of time. He believes that for the foreseeable future, OPEC+ will continue to work hard to meet its commitment to increase production, and oil prices are expected to remain high. In order to smooth inflationary pressures, the entry of Iranian crude oil into the market has become one of the few options of the US government.
Insufficient investment limits capacity expansion
Since the beginning of this year, international oil prices have fluctuated upwards, with a cumulative increase of more than 20%. Brent crude oil near-month contracts hit as high as $99 this week, the highest since September 2014. Uncertainty over geopolitical factors complicates the situation. As anti-epidemic restrictions are gradually lifted in many parts of the world, the demand for aviation and roads is driving energy consumption to soar, while inventories are stretching thin. The International Energy Agency said in its monthly market report that if the gap between OPEC+ production and its target level persists, supply tensions will increase the likelihood of intensified price volatility and upward pressure.
Varga said rising demand, OPEC+ supply constraints, geopolitics and cold weather have all recently supported oil prices. What's more, the rally in oil prices combined with the rapidly rising spot premium reflects the release of bullish sentiment. At present, the compliance rate of OPEC+ production reduction agreements is close to 120%, and the release of production capacity in oil-producing countries will continue to lag behind the plan in the short term. While Saudi Arabia and the UAE have conditions for additional production increases, there is no need or desire for the two countries to break the agreement.
The reasons for the shortage of oil-producing countries are manifold, including the entry into the middle and late stages of exploitation of mature oil fields, insufficient investment in infrastructure such as pipelines, and restrictions on oil and gas development by producers in response to the Climate Change Convention. As early as last December, Saudi Oil Minister Abdulaziz bin Salman said: "If there is insufficient investment in energy development, the world will enter a dangerous period." ”
S&P predicts that OPEC+ sustainable standby capacity will be reduced to 1.2 million b/d by June, and this idle capacity will increasingly be concentrated in Saudi Arabia, the United Arab Emirates and Kuwait, and this dynamic will have to be managed if the market needs more OPEC crude oil. In contrast, the capacity of other countries – notably Russia, Iraq, Angola, Nigeria, and Malaysia – is still far from the quota requirement.
The first financial reporter noted that major oil and gas producers are also cautious on the issue of increasing production, and BP CEO Bernard Looney recently said: "What we can expect is volatility in the coming months." Rising oil prices have led the oil and gas giant to record its highest annual profit in nearly eight years, prompting calls for the government to impose more taxes on oil and gas companies. Rooney said the oil market could tighten supply further this year and further support oil prices to stay above $90 a barrel. France Total CEO Patrick Pouyanne also pointed out in a recent earnings call that oil prices will remain high this year.
Varga told first financial reporters that although oil prices have become attractive, enterprises are facing industry restrictions on banking loans from many countries. In the United States, for example, he noted that most exploration firms still make capital discipline a top priority, focusing on minimizing reinvestment and maximizing free cash flow. Gains from rising commodity prices will generally be used to patch the balance sheet and flow back to shareholders through buybacks, special dividends, etc.
High oil prices hit the economies of various countries
Inflationary pressures from higher oil prices could have a negative impact on the economies of major oil-consuming countries. Janet Henry, chief economist at HSBC, pointed out that given rising global inflation pressures and unprecedented uncertainty surrounding the inflation outlook, the last thing the global economic recovery needs is for energy prices to rise again.
Notably, more than half of the G20 members of the G20 have inflation rates of more than 4%, boosted by energy prices, with Brazil, Turkey and Argentina breaking through 10%.
In the United States, according to gasbuddy, oil price statistics software, the average price per gallon of gasoline is currently approaching $3.49, up from $2.51 in the same period last year. As gasoline prices rise and investors are watching where consumer spending, which accounts for more than two-thirds of U.S. economic activity, is headed, the University of Michigan's consumer confidence index reached its lowest level in more than a decade in early February under heavy price pressure.
In the face of pressure, the United States has previously tried a variety of options to suppress oil prices. The Biden administration has tried to coordinate strategic reserve releases with other countries, releasing nearly 40 million barrels of crude oil in the past three months and planning a new round of dumping, but this is a drop in the bucket compared to the world's current consumption of nearly 100 million barrels per day. At the same time, the White House's repeated pressure on OPEC+ to increase production has not had a substantial effect.
Against the backdrop of a sharp turn for the worse in Eastern Europe, Iran has become one of the few options available. Iran's chief nuclear negotiator, Ali Bagheri Kani, recently said on social media that the work with world powers on resuming a nuclear deal is "closer than ever" to an agreement. However, there are still major differences between the parties on how to achieve iran's contraction of nuclear activities in exchange for easing sanctions.
Varga said oil prices have always been a accepted measure of U.S. president's achievements. With the midterm elections set to take place in November, oil prices in excess of $90 are well above the public's bottom line, making it imperative for the White House to contain rising oil prices.
Judging by the recently announced popular support, the Democratic election is becoming shaky. Valga expects Iran to eventually return to market with an additional 1.8 million bpd of crude oil, which is largely expected to ease concerns about supply and demand. However, the risk of oil price fluctuations in the short term still exists, first of all, the timeline of negotiations related to the Iranian nuclear agreement has not yet been fully confirmed, and secondly, the settlement of the situation in Ukraine is the top priority, because compared with Iran, Russia's oil and gas production accounts for a higher proportion of the world.
$100 oil price "terrible"
Rising oil prices have made many countries miserable. At the recent oil and gas exhibition in Cairo, Egypt, energy and oil ministers from Egypt, Cyprus, Israel and other countries were deeply concerned that oil prices could climb to more than $100 per barrel.
In his remarks, Egypt's oil minister, Tarek El-Molla, said: "For me, as a professional, I can see this (oil prices break above $100) happening, but I don't want that. ”
Cyprus Energy Minister Natasa Pilides agreed, saying imagining oil prices above $100 a barrel is a terrible concept. "It's actually pretty close." She added.
"Yes, high oil prices are hard to deal with because, on the one hand, energy subsidies over the last few months have been largely out of the norm, we're in a difficult situation, and how to stop it will be a problem when you start doing that." She revealed that in terms of energy transition, Cyprus definitely needs to stick to the original goals, and natural gas as a transitional fuel will play an important role.
Israel is also diversifying its energy as a strategy to deal with rising oil prices, with Israeli Energy Minister Karine Elharrar saying: "Oil prices are a very difficult issue, but I think if we don't want to be helpless, then we have to make sure we have multiple energy sources." ”
As OPEC's third-largest producer, when asked by the media what the group can do if the situation in Ukraine deteriorates, the UAE's energy minister Suhail al-Mazrouei said, "What is happening is geopolitical tensions, which are also the main drivers of crude oil prices." In general, the actual impact is difficult to predict. "I don't want to see the conflict escalate further and hope that the diplomatic dialogue between Russia and Europe will bear fruit." ”