Even after hitting $93 per barrel last week, oil prices have further room to rise in the coming months, with the $100 oil forecast of major investment banks now in sight.
Robust oil demand and the headroom for money managers to expand their long positions in the crude complex, combined with shrinking global spare production capacity and “worrisome” inventory levels, could push oil prices even higher, the world’s largest independent oil trader, Vitol Group, says.
Demand recovery and the mild impact of the Omicron variant on consumption, alongside the Russia-Ukraine crisis and a deep freeze in Texas that disrupted some Permian oil production, sent WTI Crude to over $92 per barrel at the end of last week, while Brent Crude hit $93—levels at which the benchmarks continued to trade early on Monday.
Geopolitical tension aside, the market fundamentals appear strong, and China could add more strength if it moves to replenish some of its crude reserves, Mike Muller, Head of Vitol Asia, told Gulf Intelligence’s daily energy markets video podcast on Sunday.
China could begin filling its crude stocks, even at $90 a barrel oil, because some restocking could be needed, the executive at the world’s top oil trader said.
“I think it’s fair to state that China is at bare-minimum operating level in terms of the prescribed level of mandatory stockholding that state enterprises are meant to hold,” Muller said during the Gulf Intelligence podcast.
“All eyes are on what happens in China after the Chinese New Year because there’s a feeling that some restocking will be required,” he added.
“If you look at the spot behavior at the very front of the market it doesn’t look like they’ve had their foot off the pedal. Up until the very last day before Chinese New Year, the state-owned enterprises seemed interested in buying crude at these prices,” Muller said.
What is more, according to Vitol’s executive, China doesn’t appear to be as sensitive to high oil prices as South Asian nations are.
Overall, the front futures price structure is so backwardated that “the market is telling you: be careful, don’t be short because you are one disruption, one refinery wobble away from markets getting even stronger,” Muller noted.
Apart from the potential Chinese restocking after the Chinese New Year festivities end this week, the most recent positioning of the money managers shows there is still room for more long positioning in oil, according to Vitol and analysts.
In the latest reporting week to February 1, speculators were net sellers of crude oil for the third week. The net long—the difference between bullish and bearish bets—in WTI rose by 6,400 lots, but the Brent net-long dropped by 13,000 lots in the week to February 1. Thus, the combined net long in the two most traded benchmarks was slightly reduced to 533,000 lots, which is some 200,000 lots below the June peak when prices traded 25 percent lower, Ole Hansen, Head of Commodity Strategy at Saxo Bank, said on Sunday.
“Both WTI and Brent reached new cycle highs above $90 with rising front-month spreads signaling increased tightness. The combination of tight supply, inflation, the weaker dollar and the current turmoil in stocks and bonds are likely to have driven increased demand from paper investors, with asset managers and speculators at large funds seeking a haven to help weather the storm currently blowing across their traditional investment portfolios,” Hansen said in a weekly commodity market analysis on Friday.
According to ING strategists Warren Patterson and Wenyu Yao, “The options market is also proving supportive, with sellers of U$100/bbl calls having to hedge their position as the market nears the US$100/bbl level.”
$100 oil is in the cards this year, and it could be reached as soon as the second quarter, according to Bank of America, for example.
Tighter market balances, coupled with shrinking spare production capacity, have made a growing number of investment banks more bullish on oil. Major Wall Street banks, including Goldman Sachs, Bank of America, JP Morgan, and Morgan Stanley, expect prices to hit $100 a barrel as soon as this year.
By Tsvetana Paraskova for Oilprice.com
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And at a time of escalating tension over Taiwan between China and the United States, China intends to keep its Strategic Petroleum Reserve (SPR) at its highest level irrespective how high prices are.
Dr Mamdouh G Salameh
International Oil Economist
Visiting Professor of Energy Economics at ESCP Europe Business School, London
Whats different this time is investors realize this is the last go around for oil and gas. The next global recession is going to be costly for the whole industry as a double whammy of declining demand due to economic slowdown gets pushed harder as electric vehicles and clean energy make even larger inroads and gain more than 50% market share over a short time horizon of less than 10 years.
Price is King in our material world, and unfortunately for oil its a losing battle as the cost to power vehicles with gas is prohibitive when compared to the cost to power with electricity and the cost to generate electricity is prohibitive with coal, or oil, or gas, when compared to wind, solar and battery storage. The battle is no longer about whats better for the environment, its now about whats better for the environment and the economy.
Game over is just around the corner.
Those electric cars require the mining of a great deal of lithium, which of course requires a lot of diesel. You can't run mining equipment, or build the mines, from windmills and PV panels. Other standard materials used in those vehicles require the consumption of huge amounts of petroleum products. The energy utilized just to build the battery assembly is very significant, to say nothing of the materials used. There are thousands of cells that all must be connected together through silver soldering, and then packaged in a metal container that is a difficult manufacturing operation.
The electric car proponents say that an electric car battery, which actually comprises more than half the price of the vehicle, can last up to 20 years. However, manufacturers only offer warranties somewhere between 5-8 years, because in practice that is how long they actually last. Those cells lose power storage capacity over time as well; after a couple of years, they are most likely at 70-80% of their as-new power storage capacity. Further, if one cell among hundreds or thousands go bad, it is enough to seriously incapacitate the battery to the point of making it non-functional.
Only a fraction of electric car owners will have the resources to fund solar panel installation with the capacity to charge the car. Most people will have to plug their vehicles into the electrical grid, which of course means more fuel burned back at the power plant. The grid itself will have to be expanded to deal with the increased power demands, meaning more power stations, transformers, high tension towers etc. All of this requires petroleum to power and build.
Even if the entire automobile fleet were to somehow go fully electric, the net improvement to power consumption would be perhaps 50%. So if the best thermal powerplants were used (about 60% thermal efficiency) to charge those vehicles, and transformer/line resistances were lowered to the least amount possible, then the overall grid efficiency for a fully electric fleet might approach 50%. Since the ICE automobile fleet on average is around 30% efficient, there could be a 1.5x improvement in efficiency overall. This is actually a very significant gain in efficiency and it certainly needs to be done, but there is still going to be a massive amount of petroleum needed to make it all happen. Indeed, Jevon's rule says that the more you save the more you use - that is, even if you save 50%, you end up using more such that the savings disappear.
Finally, a great deal of petroleum (around 30% or more) is used just to grow food. About 10 calories of diesel are used to grow 1 calorie of food, so in order to feed 8-9 billion people then 30mm bbls of diesel + nat gas have to be consumed daily. This number is not going to go down, baring any catastrophic events.
So the game is not over for petroleum by any means despite independence 1776d's assertion, rather, things are going to get much more frantic and costly. If anything, the rate and consumption of petroleum will only increase going forward until the last drop is burned.