Earlier in the week, OPEC released its monthly report, which included forecasts for next quarter’s demand and supply. According to the cartel, demand in Q4 will exceed supply by over 3M bbl. That explains the recent increase in oil prices.
More to the point, that mismatch between supply and demand would be a larger gap than in the fourth quarter of 2021, after which oil prices climbed into the triple-digits. Of course, the market was vastly distorted last year because of the war in Ukraine. Despite a surge in production that outstripped consumption through most of the year, the price of oil was elevated due to sanctions imposed on Russia.
Normalization and destabilization
But the market has now adjusted to the Russian situation. Europe was able to weather a winter without major energy problems, and the continent has its gas inventory fully stocked heading into the cold season. Additionally, new transportation facilities have come online, meaning the logistics squeeze of last year is likely to not be felt this time around. There will be something else.
Prices at the pump in the US have hit the highest they’ve been for the season in ten years. That was back before the Iran deal that saw crude prices plummeting from triple digits. The deficit in production forecast by OPEC – taking into account the cuts by both Russia and Saudi Arabia – is the largest in ten years. Funny that coincidence.
The demand for higher prices
It’s no secret that the world’s largest producers are cutting supply because they want to make more money. Russia wants to see higher crude prices because sanctions force it to sell at a discount, primarily to China. And they need to fund the war effort. But they are not alone.
Press speculation shows that in order for Saudi Arabia to meet its budget requirements, crude has to be above $100/bbl. That includes the regular government spending on ambitious new projects that the Kingdom has embarked under Crown Prince Mohammad Bin Salman, with the most expensive perhaps being the futuristic city known as Neom.
Where’s the peak?
Saudi Arabia has made the largest of the cuts and has done so voluntarily. The thought is that the Kingdom could start easing up on the production curbs once the price of crude reaches a desirable level. But after Brent broke through $90/bbl. there was no sign of easing on the curbs. In fact, Saudi Arabia announced it would extend the production shut-in. With other major producers, such as the US and Canada, unwilling to spring into the production void, there is little room for the price to go but up.
The one major exception could be economic growth. OPEC based its calculations on expectations that demand will rise through the rest of the year. The IEA has a similar view, also expecting supply to not meet demand by December. But both of these forecasts rely on increasing demand from China and the US. China’s economy has been stumbling lately, but the US is increasingly seen as avoiding a recession. The thing is, if economists were wrong about the US entering a recession earlier this year, they could be wrong about the US avoiding a recession later this year.
