Yves here. The general thesis of this post is plausible: The trajectory of oil prices is even more murky than usual by virtue of being subject to two volatile and hard to predict trends: demand and supply destruction. Hedgers like airlines will be having fits.
By Irina Slav, a writer for Oilprice.com with over a decade of experience writing on the oil and gas industry. Originally published at OilPrice
From $35 per barrel to $130 per barrel—this is the range for oil prices in the next few years that we could see, according to a commodity trading group. And it will all depend on what peaks first: demand or investment in new production.”You could see spikes to even higher than $100 a barrel, even $130, and you could also see it go down to $35 a barrel for periods of time going forward,” William Reed II, chief executive of Castleton Commodities International, said at the FT Global Commodities Summit this week, asquotedby Reuters. “The question is what happens first. Peak demand or peak investment?”
This is a fascinating question that will likely remain open for quite some time; it seems as if forecasts are even more unreliable than usual in the post-pandemic world. For instance, last year, energy authorities and the industry itself predicted oil demand growth was over thanks to the pandemic that encouraged a doubling down on an energy shift away from fossil fuels. Now, these same forecasters, including the International Energy Agency and BP(3.22%), are talking about growing oil demand.
One thing that can hardly be disputed is that lower spending on exploration would inevitably lead to lower production. This is what we have seen: the pandemic forced virtually everyone in the oil industry to slash their spending plans. This is what normally happens during the trough phase of an industry cycle.
What doesn’t normally happen in a usual cycle is long-term planning for smaller output. Yet this is the response of Big Oil to the push to go green. Most supermajors are planning changes that would effectively reduce their production of oil and gas. In Shell’s(3.58%)case, it has been literally ordered by a Dutch court to shrink its production of oil and gas.
So, it’s pretty clear that supply is tightening, and oil prices are reflecting this. In fact, supply has lately shrunk so much that even the International Energy Agency, which earlier this yearcalledfor a suspension of all new oil and gas exploration, is nowcallingfor more supply. This is the perfect illustration of how difficult it has become to predict where oil prices would go even in the short term, let alone a period of several years.
According to Castleton’s Reed, the recovery in oil prices was only to be expected. In that, he is the latest in the growing choir of voices predicting higher prices, even north of $100 per barrel, before too long. Yet, according to some, they might only stay there for a short while and then never reach the same levels.
Earlier this month, a Boston Consulting Group report titledThe Last Oil Price Boom May Be in Sightsuggested that what we are now witnessing may be not just the last oil price rally but the shortest one, too. The consultancy noted the fast rally in prices since the start of this year as an indication of the “compressed time span” of the boom.
“This quick rise will put pressure on suppliers, which will expand capex to meet rising demand, and end users, which will leverage efficiency as well as increasingly available new technologies to mitigate—or even avoid altogether—the price of oil and its attendant emissions,” Boston Consulting Group’s report authors wrote.
Things in oil prices are indeed moving faster than usual, but if we are being fair, the past year has been anything but usual. The biggest consequence of the pandemic was a boom in uncertainty, which has made forecasting anything much more difficult than before. As noted above, oil demand forecasts are a good example of this heightened uncertainty. There are also challenges that the energy transition push is facing that could derail it or at the very least postpone it. This contributes to the uncertain future of oil prices and the argument for supervolatility.
Solar panelpricesare on the rise, for instance. The reason is supply chain disruptions caused by the pandemic. There is also emerging environmentalistoppositionto utility-scale solar farms. Issues such s copper supply for windmills and EVs, and battery minerals are also dimming the outlook for the energy transition and implicitly work in favor of oil and gas.
So, it is easy to see how Brent crude could hit $100 per barrel before this year’s end if demand continues recovering at the current rate. Even the additional OPEC+ supply coming to markets next month may not be enough to reverse the trend.
It is a little harder to see oil falling to $35 a barrel unless a lot more supply is added. This would be a perfectly realistic scenario in any other cycle. Now, producers both in OPEC and outside it are wary of the energy transition and its expected effect on their business, and are not in a rush to boost production. The question of what will come first, peak demand or peak investment, remains open.
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What if it goes to 200$/barrel or even higher? In some sense I think it would be good news even if harmful for some many economies, including import-dependent Spain. Definitely 35$/barrel is bad news and I have no economical interests in oil.
if oil goes to $200 a barrel, the frackers will be drilling to shale formations thirty feet thick with only 1% hydrocarbon content…if futures contract prices follow the front month price, they could lock in years of that, regardless of what oil prices do after they hit $200…
Highly uncertain oil prices is probably good news for the planet, as it discourages long term investment. Investing in oil beyond a 2 or 3 year time frame is now a super high risk venture fund type punt. While Peak Oil is now generally considered discredited, its precisely this type of wild swing in price that was predicted by Peak Oil pundits a decade or so ago.
The article is a little confused in its comments on renewables. Since renewables are primarily about electricity they have little connection with oil prices in the short term (in the longer term it can influence the uptake of EV’s, but even this is uncertain). Wind and solar are however in a very tight linkeage with gas demand, although not in a straightforward manner. In the short to medium term major investments in renewables are beneficial for gas as gas turbines are the major source of balancing in most grids. It is the big thermal plants (coal usually) that are displaced when renewables make major inroads to electricity generation. As wind and solar gears up, its coal plants that are being abandoned, not CCGT plants. But it does complicated supply and demand – for example, a couple of years ago a particularly windy winter in Ireland played havoc with the local gas supply company as gas demand was far lower than anticipated, a particularly problem as they had pre-bought in supplies. This sort of uncertaintly can make investing in new capacity very risky, but it can make squeezing the maximum out of existing plant very profitable. The interrelationships are very complex.
Another wild card in the mix is the huge increase in electicity demand for data centres and bitcoin. The big companies (even the evil Amazon) is, mostly for PR and internal reasons, generally demanding the power is only sourced from renewables. This is creating a distortion in the market which could be very bad news for gas suppliers, and is complicating supply management for grid networks. A lot depends on how flexible these users will be if it comes to a supply crunch during dips in renewable supply. Will they reduce their demand or insist on supply at the expense of domestic users? Time will tell.
“While Peak Oil is now generally considered discredited, its precisely this type of wild swing in price that was predicted by Peak Oil pundits a decade or so ago.”
I suppose it is something of a quibble, but do not agree that the Peak Oil — concept — has been generally discredited, although I do believe it has been generally misunderstood and misapplied. The Peak Oil Movement from around 2005 or so has been discredited, chiefly for making bad predictions by using Hubbert’s simple model as a predictive tool. Also the predictions Hubbert made in his paper were faulty. He may have kinda-sorta predicted Peak Oil in the US happening around 1970 but what kind of prediction is it that’s based on bad guestimates feeding a simple model?
If oil is finite, how could there not be some point of Peak Oil?
“As Hubbert wrote in his paper, ‘if we knew the quantity (of some resource) initially present, we could draw a family of possible production curves, all of which would exhibit the common property of beginning and ending at zero, and encompassing an area equal to or less than the initial quantity.’” [ “The Myth of Peak Oil” https://www.counterpunch.org/2012/03/29/the-myth-of-peak-oil/ ]
Attempting to predict the supply of oil or price for oil based on this simple commonsense idea rightly is and should be discredited.
But generalizing oil to include fossil fuels — if we keep using fossil fuels, they will eventually run out. I am not aware that anything has been discovered to replace fossil fuels as the source of power for our Civilization. When fossil fuels do start to run out we will be in a world of hurt.
If we burn so much fossil fuel as to actually get to the “start to run out” phase, we will also be in a world of hot. Hotter than now.
“This quick rise will put pressure on suppliers, which will expand capex to meet rising demand, and end users, which will leverage efficiency as well as increasingly available new technologies to mitigate—or even avoid altogether—the price of oil and its attendant emissions,”
In one sense, this is true, price will go up, production will increase in response to pricing, and institutions will seek substitutes, until the price collapses. But the only important variable in this analysis is the timing.
Capex investment has been substantially reduced since 2019 in both OPEC+ nations and domestically. Even if capex increases, there is a lag between capital investment and a productive oil well. Further, the majors are cutting capex in response to political and judicial pressures, the shale producers are coming back slowly but it will be a long time until domestic oil production is comparable to 2019. If China and India start booming next year, it looks like demand could exceed 2019 pretty quickly next year, and there just isn’t enough capacity to meet it. Further, OPEC has no incentive to open the spigot, and when prices do get to a point where that makes economic sense, demand will exceed supply.
EV cars are not affordable yet, and the domestic electrical infrastructure is not capable of supporting widespread EV adoption. Renewables don’t provide reliable energy during peak consumption times, we don’t really have effective and efficient storage technologies at this time, so the idea that there is some easy or affordable substitute to oil at this time is more of a dream than a reality.
My guess is you are going to have higher prices in the near to mid-term, and the adoption of renewables will create less reliable and more expensive energy, and the result is that working class people who can’t afford gas, who are suffering in heat waves with brown outs are going to move more right populist than they already are. Its interesting that people say they are against Trump, and yet do everything in their power to exacerbate the conditions that got Trump elected in the first place.
I know it is a contrarian argument, but I see it going to zero before $130.
My argument is based on the theory that we are right now at the point where it takes more net energy to extract oil than you get out of it. Fairly soon it will be cheaper to just leave the hard-to-get stuff in the ground. Ridiculous government policies like Canada subsidizing economically unviable tar sands, not withstanding.
Existing fields once depleted may be it for the age of oil. Buckle up, or perhaps I should say, Saddle up!
Didn’t it go negative during the birth throes of the pandemic?
Yes, and I see no reason why it could not happen again. Because “markets” are actually quite rigged, and futures markets in particular can go out of whack if a huge supply or demand shock hits, as did happen in April 2020.
You all realize it did do so because market conditions quickly deteriorated, AND work from home immediately became a national response?
Oh, and planes were grounded. No one flew. Quite the one off scenario, to a reasonable outside party.
And those Humvees , whether for personal or industrial purposes will need to run on fuel. Of some kind, no less.
Yes. I tend to agree with you, knowing people who have worked in Alaska for years. The majors are not going to invest in areas where there are difficult changing (climate) conditions, for example, such as melting permafrost, and where the investment is more than the yield.
Here’s ANWR and BP in general.
https://www.npr.org/2021/01/06/953718234/major-oil-companies-take-a-pass-on-controversial-lease-sale-in-arctic-refuge
Here’s who took over the aging pipeline. If you’re interested. Go ahead spill, spill spill.
https://www.bloomberg.com/graphics/2021-tracking-carbon-emissions-BP-hilcorp/
If the civilization can make slaves pump the oil, the very uppest class will still have oil. A million slaves turning one pump.
What? Slavery is Unconstitutional? Only intergenerational chattel-slavery is unconstitutional. Prisoner slavery is still comPLETEly constitutional, thank you very much.
I’m leaning towards a more likely scenario of hitting a higher per barrel price for WTI by mid to late fall. Very anecdotal but traffic on major nearby roadways is getting heavier since earlier in 2021. Local roadways mean I 85 and I 26. Throw in a supply shock, say a major Cat 4 hurricane in these southeastern US States and away we go.
Since I’m not trained as an economic analyst, the above is merely conjecture and certainly not investment advice! Would not envy the hedgers of the industrial corps or the agricultural corps needing to prepare in energy or commodity futures.
Just to add to your point, its quite possible to have very high gas prices while global prices stay stable. One issue which will have an increasing impact on consumer pricing is refinery capacity. There has been little investment in this in much of the world for decades. Outages in refineries or other parts of the supply network could have major implications in the delivery of certain fractions. You could, for example, have a shortfall of gasoline and a surplus of deisel at the same time. I suspect we are going to see situations like this occur far more often in the future.
I share your roadways and I have also noted the uptick in traffic over the last couple of months. Of course it is summer, and people are now going back to the beach to let off (perhaps premature) post covid steam. My neighborhood seems deserted at the moment.
But on the other hand all those lockdowns and home offices have shown the degree to which we can greatly cut down on travel if we want to do so. Demand may go back down just as quickly as it went up.
If oil does go to $130 a barrel, or higher, it should be noted that petroleum is a huge input in food production and distribution, and in the developing world, a huge hike in food prices would likely trigger famine, civil unrest, and revolution in the 2023-2025 time frame, similar to the Arab Spring, triggered by the last time we had $100/barrel oil.
Energy costs effect food prices too. So, in this scenario we could expect a boost in food costs. Fortunately the government strips food and energy prices out of the calculation of the consumer price index because of their volatility. Therefore we can expect no net affect on our pocketbooks. ;-)
Folks – should we really rely on the prognostications of commodity traders ?
Since compressed natural gas can be and is used as a motor fuel perhaps we ought to focus on reducing natural gas leakage. Not to mention the losses at the well head
“Southern California Gas Co., the largest gas distribution company in the nation, reported a 0.87 percent loss rate in 2012; in 2011, that rate was 0.84 percent. In comparison, Washington Gas Light Co., which serves the greater District of Columbia, had a 3.65 percent loss rate in 2012; in 2011 it was 4.04 percent.” — Scientific American
“This lack of gathering capacity means that around one-third of all the natural gas produced in the Bakken can’t be moved to market. Instead, it is burned at the wellhead, a practice known as flaring.” pioneer-energy-sees-opportunity-in-capturing-flare-…
So it is possible to use natural gas as a motor fuel (Compressed natural gas vehicles) and with a little work it is possible to significantly increase the supply of natural gas motor fuel which in turn would have an a real impact on fuel prices,
I imagine that ‘capturing’ natural gas at the ‘leaky’ well heads will be a capital intensive endeavour. The law of diminishing returns comes into play here. As long as financial considerations control infrastructure building, nothing will change. For your idea to be practical, the State must take control of the entire energy production system. The problem with relying on “the Market” to regulate energy production systems is that, before any seriously capital intensive methods of applying conservation ‘rules’ are resorted to, the basic system has to collapse. Even if there is a ‘marginal’ profit to be made from the present, very flawed system, such “profit” will trump any and all considerations of conservation, climate change risks, and general economic dislocations. This is a case where “creative destruction” is a legitimate concept.
Unfortunately for the World, the only way I know to “break ricebowls” is to break things. The collateral damage will be immense. The alternative is Slow Death Funnies.
First the suggestion was to fix leaky distribution systems and to improve gas flaring not fix leaky well heads. The leaky well head issue is another kettle of fish.
Flare gas recovery equipment is offered as a truck mounted system that uses the natural gas for on site power generation. The on site electrical power generated drives a liquid stripping system which captures natural gas liquids which are transportable by tanker truck.
If the flare gas recovery folks are correct the simple payback for the equipment is under two years.
Note that for distribution losses the pipe lines are already in place. And leak detection and plugging programs are already in place. A program of plugging leaks needs to have some reliable numbers beside it before a discussion of capital cost begins.
And no the state doesn’t need to take over the entire energy production and distributions system.
Perhaps a simple first step would be to change the tax code that allows the write off of losses (leaks and flaring).
Don’t cheer for $130/bbl. The impact on the poor will be brutal.
That is true but I cannot cheer 35$/barrel. No cheers whatever happens except if we are able to somehow reduce consumption, may be slowly but in a continued fashion, year after year.
Don’t cheer for $35/bbl. The impact of global warming on the poor is already brutal and will only get brutaler.
A usual, Yves “hits the nail on the head” when she mentions demand destruction. If the price of oil hits $130 or more (This is perhaps close to the actual cost of production needed to fund exploration costs and capex needed to maintain oil supply in the face of depletion and harder to recover sources) the global economy, especially that of the US will quickly go into another deep recession/depression. With the economy “on the skids,” people will not be able to afford the price of gas/oil thus driving down the price. Like Chris from Georgia said- Buckle-Up!
This post wades into stormy, dark, and deep waters without a life-jacket — but I suppose that is the nature of trading commodities. Petroleum seems a much murkier commodity than most. It has a ‘market’ dominated by a few Big Money buyers vying with a few Big Money producers with strong undertows of politics affecting both. The commodity, petroleum, is a family of commodities, different weights and purities of petroleum. Different mixes of petroleum varieties are processed at a limited number of refinement facilities producing a family of by-products which provide basic feeds for entire industries. After wandering through the factors the post considers that might affect the price of petroleum, and feeling a niggling sense that several factors I can’t think of are missing from even the manifold factors the post considers as possibly affecting supply, demand, and thereby prices. If I had to trade in the petroleum commodities market right now, I think I would trust to a magic eight-ball, and sacrifice an ox to Fortuna.
The big risk here is not $130 oil – which as noted above is plenty bad in all kinds of ways.
The danger is that an Administration holding itself out as a return to competence and common sense has turned energy policy over to a group of ideologues who are pretty light in terms of direct knowledge and experience with the power grid. There are plenty of people who can talk the climate-panic thing, very eloquently. If there are any electrical engineer/power supply types, they’re not very visible or influential.
So we’ll have a Gadarene rush into additional renewables, on the (false) assumption that any unanticipated/unintended consequences can’t possibly be worse than what would follow from the current energy mix. When the chickens come home to roost, we’ll be hearing – just as we did in 2008-9 – that no one could possibly have foreseen what was coming.
It’s a beautiful setup for a Trump restoration. Which might be fun to watch, but pretty bad for the Constitution.
I like how they only see covid in the rearview mirror. That’s the spirit!