In its February short-term energy outlook (STEO), the EIA predicts global oil consumption this month to be 96.7 million barrels per day (mbpd). The supply of oil, however, is much lower, at only 93.6 mbpd, with the difference of 3.1 mbpd of need extracted from crude inventories and refined products. By historical standards, a sustained range of 3 mbpd is large and we would expect prices to rise in these circumstances.
The EIA sees demand continuing to recover at a good pace until mid-year, with a forecast for global oil consumption in July at 98.2 mbpd (but still about 4 mbpd below “normal”). This incremental demand is materially supplied by two sources, Brazil and OPEC. We could accept the growth of Brazil’s crude oil production as it stands, allowing the calendar to be out for a month or two. The fundamental issue, on the other hand, is OPEC’s intentions.
The EIA uses a model based on volume (or demand), which implies that OPEC will passively increase production to meet demand and therefore keep oil prices low. But why would OPEC do it? If OPEC simply maintained current production levels, the world would be at 3.5 mbpd of supply by mid-year. There is a deficit of 3.5 mbpd, 3.6% of world consumption. It would quickly deplete the remaining surplus inventories, leaving only oil prices as mediators between supply and demand, just as the world economy shows strength and momentum at the end of the pandemic. In other words, in the coming months consumers will be prepared to compete for available barrels of oil, and this should drive up oil prices sharply.
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This is the $ 100 a barrel thesis.
Some important notes and warnings. In many cases, operators have to commit to producing barrels before they know what the price will be. In this case, OPEC can let prices go up and add barrels at its discretion. This provides OPEC with great control and flexibility over oil prices. Certainly, higher oil prices are better, but more barrels can be added in the short term if OPEC believes the market is overheating. This should encourage OPEC to try ever higher price levels.
And, of course, Middle Eastern politics is complicated. The complex interaction between Iran, Saudi Arabia and the United States can produce unexpected results. If Iran picks up more, it could probably return the United States to some sort of agreement, thus freeing Tehran to increase oil exports and lower oil prices. On the other hand, the Houthi attack on Saudi oil facilities at the port of Ras Tanura may push the Saudis back into the U.S. and motivate the Kingdom to keep oil prices lower to favor the Biden administration.
It’s hard to know where the balance comes from. However, it is now OPEC’s best chance to make real money in the short to medium term. They would be fools to pass up the opportunity.
Per Steven Kopits of Princeton Energy Advisors through Zerohedge.com
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