Is it demand or production destruction causing high oil prices?
When my Grandad and Dad were at the dinner table, we would talk about oil prices with supply, demand, drilling tech and how good the roast was. Well now the dinner table is on the move with sporting events, travel, running here, running there, and trying to run a business. Dinner has shifted from family discussions to meals on wheels, and the family discussions all take place via text.
I am not sure I like the transition, and now we can get world market information within minutes, and almost too much to digest at a sitting. To try and digest some of the market concerns that my stakeholders are asking we will start with the EIA most current Short-Term Energy Outlook and go from there.
There are some nice nuggets in the first few paragraphs.
- The Brent crude oil spot price averaged $117 per barrel (b) in March, a $20/b increase from February.Crude oil prices increased following the further invasion of Ukraine by Russia. Sanctions on Russia and other actions contributed to falling oil production in Russia and created significant market uncertainties about the potential for further oil supply disruptions. These events occurred against a backdrop of low oil inventories and persistent upward oil price pressures. Global oil inventory draws averaged 1.7 million barrels per day (b/d) from the third quarter of 2020 (3Q20) through the end of 2021. We estimate that commercial oil inventories in the OECD ended 1Q22 at 2.61 billion barrels, up slightly from February, which was the lowest level since April 2014.
- We expect the Brent price will average $108/b in 2Q22 and $102/b in the second half of 2022 (2H22). We expect the average price to fall to $93/b in 2023. However, this price forecast is highly uncertain.Actual price outcomes will depend on the degree to which existing sanctions imposed on Russia, any potential future sanctions, and independent corporate actions affect Russia’s oil production or the sale of Russia’s oil in the global market. In addition, the degree to which other oil producers respond to current oil prices, as well as the effects macroeconomic developments might have on global oil demand, will be important for oil price formation in the coming months. Although we reduced Russia’s oil production in our forecast, we still expect that global oil inventories will build at an average rate of 0.5 million b/d from 2Q22 through the end of 2023, which we expect will put downward pressure on crude oil prices. However, if production disruptions—in Russia or elsewhere—are more than we forecast, the resulting crude oil prices would be higher than our current forecast.
- We estimate that 98.3 million b/d of petroleum and liquid fuels was consumed globally in March 2022, an increase of 2.4 million b/d from March 2021. We forecast that global consumption of petroleum and liquid fuels will average 99.8 million b/d for all of 2022, which is a 2.4 million b/d increase from 2021. However, this forecast is down by 0.8 million b/d from last month’s forecast as a result of downward revisions to global GDP growth from Oxford Economics. We forecast that global consumption of petroleum and liquid fuels will rise by 1.9 million b/d in 2023 to average 101.7 million b/d. The outlook for economic growth and oil consumption in Russia and surrounding countries continues to be highly uncertain.
Please note the chart below. The consumption vs. production is close and makes sense that the EIA is calling for $102 through the end of $2022 and $93 in 2023 when not accounting for some key data points.
The Bottom Line
It might have been better to just print only the highlighted portions, but it is more fun to let you get more flavor of what the EIA is talking about. The fact that many of the ESG investors were calling for oil and gas demise and oil demand shrinking to zero, is now a dispelled myth. Here are my key bullet points.
· Oil demand destruction from inflation will occur.
· Russian oil wells that are being shut in due to slowdown in demand may not come back online.
· Russia’s loss of production capabilities could grow to more than 7 million barrels per day.
· This loss of production will be the biggest in Russia’s history since the 1990’s.
· As I wrote earlier in the week, the costs of drilling have just about doubled.
· Capital infusion is still an issue in the market, but investors are enjoying returns.
· India has been buying Russian over 40 million barrels of oil in the last two months.
· There is a strong demand even with demand destruction factored in.
· OPEC only slightly raised production quotas, and there are strong questions about any spare capacity.
The graphic below is the current EIA’s monthly forecast into 2023. What this does not consider is the production loss of Russia’s oil production. Russia will still be able to sell oil on the open markets as Oilprice.com published an article today that indicates there will be no way to track Russian oil after it has been refined.
As I started this article with the change in my family’s dinner habits, oil and gas investors are now looking for answers in different places. Getting good data is tough and picking through the flood of information at our fingertips is worse than drinking from a fire hose. The old saying “There is Gold in them thar hills”, is now “There is a lot more money in them barrels than gold in the hills”.
Investors will have the opportunity to diversify their portfolio into Alternative Investments that are based upon commodities and have assets owned in the funds.
As always check with your CPA if alternative investments are good for your portfolio
Please reach out to our team at any time for answers to your questions.
Jay R. Young, CEO, King Operating
ForbesBooks Author of “The Upside of Investing in Oil and Gas"