OHE IS philosophy rarely mixes. But when David Fyfe of Argus Media, a publisher, calls out the production quotas set by the Organization of the Petroleum Exporting Countries (OPEC) and its allies a “Platonic ideal” – more a theoretical model than a practical guide – it captures the sense of self-doubt that is now gripping energy markets. Every month since July, the group has pledged to increase production by 400,000 barrels per day (bpd). But the experts can’t decide whether that’s too little or too much, and whether the goal really means much.
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The latest cartel meeting, on February 2, took place amid heightened fears of a Russian invasion of Ukraine (Russia, the world’s second-largest oil exporter, is a member of the extended cartel, known as OPEC+). Only the previous week, the price of a barrel of Brent had exceeded 90 dollars, its highest level in seven years. The alliance promised to increase production again, by the usual amount. This calmed the markets down a bit. The question is what happens next.
Many Wall Street analysts have raised their oil price forecasts for this year above $100 a barrel. The war in Ukraine, they say, could push it well past $120. A conflict would probably not physically disrupt the supply. Unlike the gas it transports to Europe, Russia mainly exports oil by sea. Instead, fear of potential trade sanctions can inflame prices.
Geopolitics aside, the bullish case hinges on resurgent demand. The International Energy Agency estimates that oil consumption will rise from its current level of around 97 million bpd to 100 million bpd – a return to pre-covid levels – by the end of the year, even before global aviation fully recovers. Damien Courvalin of Goldman Sachs, a bank, says consumers switching from oil to gas (whose prices have soared in Europe) may have boosted demand by up to 1 million bpd, leading to “extremely low inventory levels “.
Supply is also tight. Paul Sheldon from S&P Global Platts, a data company, estimates that spare global production capacity is only around 2.6 million bpd. And promises by OPEC+ you can’t count on it. Many members have struggled to scale up production due to both underinvestment and covid-related bottlenecks. BloombergNAVEa research firm, notes that in December the club produced 747,000 barrels per day less than its quota allowed.
The bear case hinges on patience, a Persian restoration and a Permian boom. If Russian exports are not cut, the impact of geopolitical tensions should dissipate by the summer. By then, America will likely have raised interest rates, dampening growth and oil demand, as will additional oil supply. OPEC+ comes to market. A revival of the Iran nuclear deal, meanwhile, looks more likely than at any time since 2017, when it was torn up. The lifting of the associated sanctions could release an additional 1 million barrels per day.
The real wild card is shale. Until 2014, when OPEC orchestrated a crash in oil prices, shale drillers raised cheap financing to boost production, making America the largest oil producer in the world. But investors, who may have lost $300 billion, are now demanding high returns.
Oil bosses have spoken of strict capital discipline. Still, it’s hard to resist the high prices. Baker Hughes, an oil services company, had 610 active rigs in America at the end of January, 226 more than a year ago. BNEF predicts that production in the Permian Basin could increase by up to 1 million barrels per day by the end of 2023; ExxonMobil, an oil major, plans to increase production there by a quarter this year. As energy philosophers like to say, the best cure for high prices is high prices. ■
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This article appeared in the Finance and Economics section of the print edition under the title “A slippery zone”