The Perfect Storm In Oil Caught Markets Off Guard

Two years ago, at the height of the pandemic, BP wrote in its Annual Energy Outlook that global oil demand peaked at around 100 million bpd in 2019, and was only going to decline further due to the effects of the pandemic and the accelerating energy transition. Barely two years later, BP is admitting he may have underestimated the world’s thirst for oil, even as he heroically sticks to his long-term prediction that the electrification of transportation will eventually usher in the era of peak oil demand.

Investment banks, meanwhile, anticipated the rebound in demand as it was the natural thing to happen after the pandemic depression caused by all the lockdowns. What they didn’t predict — because it’s impossible to predict — is the magnitude and speed of the rebound.

Jeffrey Currie of Goldman Sachs recently acknowledged this gap between expectations and reality in a interview with Bloomberg, saying, “Markets have moved faster and the fundamental tightness is deeper than we would have thought three or six months ago.

“This is where we should be, but it’s much deeper than we initially thought. Energy and food right now, as we enter the summer months, are heavily skewed on the rise,” Currie added.

It may be worth noting that as recently as three to six months ago, long before Russian supply became a factor in the potential for higher oil prices, there were few authoritative voices arguing that the oil market was actually balanced.

Citi’s Ed Morse was one such voice. In February, he told Bloomberg’s Javier Blas that he expected the oil market to move into surplus territory thanks to increased oil production from the United States, the Permian in particular, Brazil. and Canada.

Indeed, the Energy Information Administration recently provide Oil production in the Permian is reportedly at a record high this month, but that doesn’t appear to be enough to offset the global oil imbalance, with many U.S. producers signaling they are unwilling – or unable due to shortages and delays – to increase production.

In Canada, production is on the rise and, according to Alberta Premier Jason Kenney, the country’s total could increase by nearly 1 million bpd, but it hasn’t yet. In Brazil, production is also on the rise but has so far failed to make a difference in the pricing department.

Of course, the reasons for this price situation are, first, the sanctions against Russia, which happens to be the world’s largest oil and fuel exporter, and second, OPEC’s inability to produce as much as she had agreed due to chronic issues with some members of the cartel. Meanwhile, the two OPEC members that have enough spare capacity to offset the loss of Russian barrels, Saudi Arabia and the United Arab Emirates, are reluctant to tap it.

Related: What Biden is wrong about Big Oil profits

There may be a genius oil analyst somewhere who foresaw this. Maybe it doesn’t take a rocket scientist to spot the patterns: OPEC members who can’t meet their own production quotas have struggled to increase production for years; relations between the oil states of the Middle East and the West have also been deteriorating for years. And the fact that Russia is the biggest oil exporter in the world is not exactly news.

Perhaps the biggest surprise, the thing that was extremely difficult to predict, was how quickly demand for oil rebounded and how resilient that demand was despite much higher oil prices than the world has seen for years. . In hindsight, it’s easy to attribute it to pent-up demand after the shutdowns, but hindsight is known to help explain events that were nearly impossible to predict.

The problem with oil and any other analysis is, of course, that there are always assumptions to be made for lack of all the necessary information. Guessing is often safe to make, but sometimes when a wild card comes into play, guessing quickly becomes worthless. In this case, the wild card was Russia, but even known cards refused to play into analysts’ assumptions.

US production is not rising as much or as fast as some had expected, as WTI climbed above $100 and stayed there. Transport electrification is not undermining demand as transport electrification is happening much slower than expected. And, perhaps more importantly, OPEC+ may say it will increase production by an additional million barrels per day, but it is very far from certain that words will translate into actions.

These seem to be all the ingredients needed for a perfect oil storm, spiced up with the latest massive oil field failure in Libya. Things are, indeed, worse than everyone expected and, perhaps more worryingly, they will remain so for some time to come as there is no silver bullet on the table. .

The latest from the world’s largest consumer imposes limits on exports. This would certainly lower domestic prices, but would push international prices further and could damage Washington’s friendship with Brussels. The latest news from the world’s largest importer is that it is supply on crude as refinery output declines. Stocking up seems like the smart thing to do during this storm.

By Irina Slav for Oilprice.com

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