While plenty of market observers reckon oil will soon hit $100 (£74) a barrel, there is not much talk of it soaring beyond that, as we’ve seen in other commodities recently. Gas is an obvious example, driven by fairly extreme conditions, but even iron ore stayed well above $200 a tonne for months before coming back down. Oil, however, seems a different case.
This slightly bearish view of oil climbing and coming back down gently is shared by BP (BP.), which said in its 2021 results that the market would “move back into balance” this year. The Opec cartel and the Energy Information Agency (EIA) in the US have also put forward similar ideas, although BP noted it was up to Opec (plus Russia) to feed in more supply for this balance to be reached.
Supply and demand in the oil market tend to sit around the 100mn barrel per day (bopd) mark, and as Covid-19 started to bite, Opec cut supply by almost 10mn bopd to shore up prices amid tumbling demand.
The assumptions underpinning the idea that oil will hit $100 a barrel then gracefully tumble are worth interrogating. Rory Johnston does just that this week in the Commodities Context newsletter.
The would-be catalysts for the drop include US shale production fully rebounding, Opec-plus increasing production, non-Opec producers hitting new records, and no major changes to Iranian and Venezuelan sanctions.
There are some very large assumptions in here: the biggest being that the US shale producers did not learn a thing from their last descent into bankruptcy and oversupply: “Both the EIA and Opec continue to expect US producers to fall back on old ways: opening the investment spigot—maybe not all the way, but certainly wider—and growing production by more than 1mn bopd through 2022,” Johnston said.
So that is 1mn barrels a day that might not turn up. How about Opec? Can it just turn on millions of barrels a day to meet higher demand? Consultancy Rystad Energy says maybe not: “There is anxiety about damage to production capacity from Saudi Arabia to Kuwait and Russia, from too-low investments during the pandemic and before,” said head of oil markets Bjørnar Tonhaugen, although he pointed out the only option was to wait and see once the cartel gives the go-ahead.
For oil producers, this is not a bad state of affairs: prices are strong and only another major outbreak might knock them off course in the short term, although governments would be sweating at the prospect of handling inflation with oil much beyond $100.
The forecasters, meanwhile, will be crossing their fingers that these predictions don’t make an ass out of everyone.
