When President Joe Biden announced plans to release up to 50 million barrels of oil from the strategic petroleum reserve to lower retail fuel prices, many analysts warned that any effect this move would have would be short-lived. Indeed, prices dropped for a very short while and are now on the climb again, with the number of three-digit price forecasts growing.
The strategic reserve release was already a desperate attempt to put a lid on gasoline prices, pushed up by crude oil prices, themselves the result of a faster rebound in global demand and production constraints among OPEC members. The Omicron variant of the coronavirus, like the SPR release plans, had a transitory negative effect on benchmarks, but before long, they were once again on the rise.
Morgan Stanley expects Brent crude to reach $90 per barrel later this year. This is also the price forecast of Goldman. JP Morgan recently said that crude could reach and exceed $100 this year, noting the decline in OPEC spare production capacity. The latest to join the bullish choir is Vitol, whose head for Asian operations told Bloomberg last week that oil had further up to go because of tight supply.
What this means for the Biden administration and its efforts to keep gasoline affordable for voters ahead of the midterms is nothing good. Perhaps more SPR releases could be organized, but that would have little more effective than the first announcement: like plenty of analysts has explained, oil prices are influenced by global rather than local factors, even a major oil-producing country such as the United States.
“Assuming China doesn’t suffer a sharp slowdown, that Omicron actually becomes Omi-gone, and with OPEC+’s ability to raise production clearly limited, I see no reason why Brent crude cannot move towards $100 in Q1, possibly sooner,” OANDA senior market analyst Jeffrey Halley told Reuters last week.
If Brent moves towards $100, West Texas Intermediate will not be far behind, even with rising U.S. production. The problem, from a Washington perspective, is that even with rising U.S. production, global supply remains short of demand, ironically because of OPEC, which Biden personally pleaded with to raise oil production so U.S. prices at the pump would ease.
“OPEC+ remain steadfast in adding 400,000 bpd back to the market each month, but our data suggests that monthly additions tally closer to 250,000 bpd,” said RBC Capital Markets commodity strategist Mike Tran in a note, as quoted by Reuters.
Many OPEC members are struggling with their higher production quotas because of technical issues, such as Nigeria, or because of political factors, such as Libya, which, to be fair, has been exempted from any production cuts and can pump at will as long as the political situation in the country allows it. Recent outages took an estimated 500,000 bpd or more out of its total output.
Just how strong the upside potential for oil prices is right now is evident in the fact that although Libyan production is on the rebound, prices are not declining. The country’s oil minister said at the end of last week that production was back to 1.2 million bpd. Yet Brent crude was trading at more than $86 a barrel at the time of writing, with WTI at over $84.
The reason for this is structural. The supply problem is not a temporary issue that can be fixed quickly or easily. First, there is the limited OPEC spare capacity, which has been on the decline for the past two years amid the pandemic. Second, there is the potentially more serious problem of underinvestment, this one driven not so much by the pandemic as by the ESG trend that has made shareholders a lot more demanding about companies’ environmental credentials than their money-making abilities.
Apparently, however, end-consumers do not care as much about environmental credentials as shareholders. They care about having fuel for their cars, resulting in demand rising so steadily. Even the International Energy Agency had to backtrack from calls for the immediate suspension of all investments in new oil and gas production and instead call for more investments. According to the IEA, global oil supply is at least 1 million bpd below demand.
This is a gap that would be difficult to fill, even if the whole U.S. shale oil industry started drilling wells. First, because shareholders would lash out. Second, because even in the shale patch, it takes some time to drill enough wells to make a difference in international prices, especially when few other producers have the capacity to do the same.
There is little left to do for the White House and other decision-makers than sit and wait to see how the oil price game will play out. It is telling enough that OPEC does not want Brent to reach $100, per comments made by the oil minister of Oman.
“We’re very careful at OPEC+, we will look at each month as we go,” Mohammed Al Rumhi told Bloomberg in an interview last week. “But so far, I think 400,000 is good because demand is increasing and we want to make sure that the market is not overheating. We don’t want to see $100 a barrel. The world is not ready for that.”
Yet if OPEC is not ready to add enough production to keep the market well supplied, then the future of oil prices is out of the cartel’s hands as well.