The soon-to-be expiring February WTI oil contract hit $87.00 in a flash as surging demand, falling supply, and a spattering of geopolitical risk has got the market surging higher. Oil was already rocking on reports that OPEC production is not keeping up with their expectations for strong demand. Their counterparts at the International Energy Agency admitted that they had once again underestimated global oil demand. I know, we are all shocked, aren’t we?
The Biden administration is worried and even suggests that another release from the Strategic Petroleum Reserve might be in the offing, but don’t you think you should try to sell the oil you have already released? The U.S. SPR oil has to compete in China with illicit Iranian oil that is sold under market value. We are also seeing surging production of supposed sanctions oil from Venezuela.
Geopolitical tension may be reduced a bit because Russia has not invaded Ukraine, and a headline that Russian Deputy Defense Minister said: “We do not believe there will be a military conflict in Europe.” Yet a pipeline explosion caused the late-night jump in the oil market.
Reports are that the Iraq-Turkey oil pipeline halted after the explosion and fire. The line usually carries 450kb/d from northern Iraq and feeds Mid-Eastern refineries. Reports say the fire is out and could soon be back online but is not welcomed in what all acknowledge is a very tight market.
Reuters reported that oil’s rally might extend further in the next few months due to recovering demand and limited capacity in OPEC+ to add supply, and prices could break $100 a barrel, OPEC officials have told Reuters. Oil last traded at $100 a barrel in 2014, after averaging $110 a barrel over the previous two years.
Rising shale output and competition among the world’s top oil producers in 2014 heralded a period of lower prices that appears to have come to an end as the global economy emerges from the pandemic. Outages in Libya and elsewhere, plus a limited impact on demand from the Omicron coronavirus variant, have fueled further gains in 2022. The Organization of the Petroleum Exporting Countries does not publish oil price forecasts and has not had an official price target for years. Officials and ministers from OPEC and allies led by Russia, a group known as OPEC+, are often reluctant to discuss likely price direction, or preferred price levels, on the record.
The Wall Street Journal reported that global oil demand is expected to exceed pre-pandemic levels this year thanks to growing COVID-19 immunization rates, as recent virus waves haven’t proved severe enough to warrant a return to strict lockdown measures, the International Energy Agency said Wednesday.
In its monthly oil market report, the IEA hiked its oil demand growth forecast for the coming year by 200,000 barrels a day, to 3.3 million barrels a day. The Paris-based agency also raised its demand growth forecasts for 2021 by 200,000 barrels a day to 5.5 million barrels a day.
Factoring in the IEA’s more optimistic forecasts are signs that recent coronavirus variants have been faster spreading but less fatal, helping boost global economic resilience to the virus and allowing states to continue on a path of gradually winding down lockdown restrictions. The IEA said:
“The number of COVID cases is exploding worldwide, but measures taken by governments to contain the virus are less severe than during earlier waves, and their impact on economic activity and oil demand remains relatively subdued.”
Natural gas should bounce soon as we should get a significant withdrawal. Bloomberg reports that:
“The Texas power grid and the natural gas drillers, wind farms and solar arrays that supply it are facing their second test in less than a month as subzero weather bears down on the Lone Star state.”
According to the National Weather Service, temperatures in wide swaths of the second-largest U.S. state are forecast to plunge to well below normal in the coming days.
We continue to be bullish but be on guard for corrections. Look for breaks to position and hedge.