Oil will remain at $ 120 / barrel or well beyond. And with the strong dollar it’s a double disaster
Brent is trading at $ 120 a barrel and is unlikely to drop much further as China returns to the market. And according to the UAE Minister of Energy, we have not yet reached the maximum price.
"I have never seen this combination of circumstances in my career in the past 50 years," Gary Ross, manager of hedge fund Black Gold Investors, told Bloomberg last week. "The world has very little spare capacity, the economy is strong outside of China, China is returning and we are in the midst of a global disruption in oil logistics."
The reduction in global reserve capacity has recently been in the spotlight after OPEC + decided to raise production targets for July and August in an effort to allay concerns of rising energy inflation.
However, the paper decision may never translate into action – only a few OPEC + members have the spare capacity to significantly increase production, and analysts say they may not be willing to tap into their spare capacity as that would further reduce. the buffer of available capacity, making producers less flexible in the event of production interruptions such as those that regularly plague Libya, for example.
Meanwhile, oil demand remains robust, lending further upside potential to prices, with industry observers and analysts expecting much higher prices before their level starts to affect demand.
"If we continue to consume, with the pace of consumption we have, we are not close to the peak, because China is not back yet," UAE Energy Minister Suhail Al-Mazrouei said last week, quoted by Bloomberg. "China will come with more consumption."
Indeed, China is expected to return to normal soon, despite news of a new "explosive" Covid outbreak in Shanghai. The outbreak required mass testing in a district of Beijing, but it remains to be seen whether the outbreak will spread enough to necessitate a closure under China's zero tolerance policy towards Covid and whether it will impact the economy. of Asian power. Otherwise, the summer will be painful at the pump and in all the shops that sell goods transported by trucks.
" We are at $ 120 without China, so when China comes back, oil will go up ," said Amrita Sen, chief analyst at Energy, also recently quoted by Bloomberg.
“ Even with the high prices, the demand continues because people want to travel, they want to go out. And the second thing is that governments around the world are subsidizing prices, ” Sen noted. That is, the destruction of demand is not happening as fast as it normally should.
Meanwhile, the latest news on OPEC + production is also not particularly encouraging. A Platts poll suggested that the expanded cartel once again fell well below its production target in May, after OPEC alone produced 2.7 million bpd less than agreed in April. Nigeria's production has been at its lowest since Platts polls and Libya has just said it has lost 1.1 million bpd of daily production due to continued fighting.
"With only a handful of … OPEC + participants with spare capacity, we expect OPEC + production growth to be around 160,000 bpd in July and 170,000 bpd in August," wrote JP Morgan analysts. in a note last week, reinforcing the bleak outlook for oil prices during the Northern Hemisphere summer, when demand increases thanks to increased travel.
Saudi Arabia's energy minister has long said that the current oil price situation is to blame for lack of investment. Refinery closures have also contributed to fuel shortages when demand is soaring and, of course, sanctions against Russia have not helped. Furthermore, for the European countries, the strong appreciation of the dollar makes this increase felt even more strongly.
According to Bloomberg, the supply situation at the moment is so tight that even if Saudi Arabia and the UAE used their spare capacity, it would not be enough to make up for Russia's supply losses. Virtually no one is predicting a drop in oil prices this time around. But a growing number of analysts and observers are beginning to warn of the possibility of a recession.
It will be a very hot summer for oil prices. Economies are as dependent on hydrocarbons in this moment of energy transition as it was twenty years ago, if not perhaps more so, and the transition seems more and more a distant mirage.
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The article Oil will remain at $ 120 / barrel or well beyond. And with the strong dollar it is a double disaster comes from ScenariEconomici.it .
This is a machine translation of a post published on Scenari Economici at the URL https://scenarieconomici.it/il-petrolio-restera-a-120-dollari-barile-o-ben-oltre-e-col-dollaro-forte-e-un-doppio-disastro/ on Tue, 14 Jun 2022 12:50:03 +0000.