Filenews 14 June 2022
By Javier Blas
Wall Street may be full of talk of a recession next year, but the situation regarding the energy market is another story. Most traders, policymakers and analysts see oil demand rising in 2023 and supply struggling to keep up with it.
In private discussions, Western officials worry that Brent crude will soon reach $150 a barrel from about $120 today. Some fear it will continue to grow, with the wildest rumours talking about oil reaching $175 or even $180 by the end of 2022, due to soaring demand after Covid and European sanctions against Russia. And the shock isn't going to end this year.
Amid widespread fears of soaring oil prices this summer, a new storm is growing on the horizon: the oil shock will not end in 2022. It will almost certainly unfold in the coming year as well.
The International Energy Agency (IEA) will publish its first estimate of the oil supply and demand balance for 2023 on Wednesday - marking the start of the shift of emphasis towards next year, at a time when investors are increasingly focusing on it.
Already, money has flowed into the December 2023 Brent delivery contract, pushing up its price close to $100 — a clear sign that traders are seeing the "close offer" market last. The prospect of a higher oil price for a longer duration will intensify global inflationary pressures and erode the profit margins of companies in the wider manufacturing sector.
Calculations
While everyone is waiting for the IOC's forecast, commodity trading houses, oil companies and OPEC member countries, as well as Western consumer countries, have already made their calculations. Consent to oil demand in 2023 ranges between an additional 1 million barrels per day and an additional 2.5 million barrels per day. In 2022, it is likely to have increased by 1.8 million barrels per day, according to the IOC, to about 100 million. Usually, an annual increase in demand of more than 1 million per day is considered quite strong.
The supply side doesn't seem much more auspicious. At best, oil traders expect Russia to maintain its current level of about 10 million barrels a day, down about 10% from the period before its invasion of Ukraine. But many believe that it could fall by another 1 million barrels, or even 1.5 million barrels.
The OPEC+ cartel, which began in 2022 with ample overcapacity, is also reaching its production limits. "With the exception of two or three members, everyone else is moving to their limits," OPEC secretary-general Mohammad Barkindo said last week, referring to Saudi Arabia and the United Arab Emirates.
The result will likely be a third year in a row of decline in existing oil inventories - and this after a sharp drop in global crude and refined commodity inventories over the past 18 months.
So far this year, Western governments have mitigated the impact of falling supply by releasing most barrels of their strategic oil reserves in their history. Without further action, these emergency quantity releases will expire in November, removing the largest cushion currently available to the market.
Refining factor factor of further price surge
The refining industry represents another problem. The world has essentially exhausted the excess capacity to convert crude into usable fuels such as gasoline and diesel. As a result, the refineries' profit margins have exploded, which in turn means that consumers are paying much more to fill their tanks than oil prices suggest.
The industry measures refining margins using a rough calculation called the "3-2-1 crack spread": three barrels of West Texas Intermediate crude oil are refined into two barrels of gasoline and a distillate of fuel, such as diesel. From 1985 to 2021, the spread — the gap between the price of crude and refined goods — averaged about $10.50 a barrel. Last week, it soared to an all-time high of nearly $61.
Very few new refineries will be put into operation in the next 18 months, suggesting that margins may remain high for the rest of the year, but also in 2023.
The 2023 picture has some big unknown X's – and most of them are related to the action of governments. Each of these question marks can shift supply and demand by 1 to 1.5 million barrels a day, more than enough to move prices significantly.
The most important thing is the duration of the oil sanctions against Russia, which are linked to its invasion of Ukraine. The others are China's zero-tolerance policy of Covid, Western sanctions against Iran and Venezuela, and the release of strategic reserves.
The duration and not the amount of the "key" value for the crisis
Shocks in the price of oil are usually remembered because of their amount. But that is only half the issue. The other half is their durability. And that's where the outlook for the forecasts for 2023 matters most.
The latest surge in the price of oil was brief. After a mild price hike in 2007 and early 2008, the rally accelerated in May 2008, with prices climbing above $120. By July, oil prices had reached a peak of $147.50, but by early September, they had fallen below $100. Brent was trading under $40 in December 2008.
So far, the 2021-22 oil price rally has been a replica of that of 2007-08. The price charts are almost completely identical. However, any hope that the oil market is going to follow the pattern of what happened 14 years ago misinterprets reality. Oil prices are not going to collapse.
A better ratio would be between 2011 and 2014: oil prices never returned to the historic high of 2008, yet remained above $100 almost without interruption for more than 40 months.
Brent is already moving at an average of $103 a barrel in 2022, above the 2008 annual average of $98.50 a barrel. In the next six months we may see even higher prices. However much more important is how long these prices will remain high. At the moment, the end of the crisis is not on the horizon.
Source: BloombergOpinion
