While most producers in OPEC + and elsewhere want even higher prices after the trauma of last year’s drop in prices, consumer and political scrutiny will intensify when prices rise above $ 80. With producers holding back significant amounts of production while prices rise above $ 80, consumers and consumer country governments are unlikely to be compassionate and understanding.LONDON: Oil prices are sending mixed signals on the production and consumption balance in the second half of 2021 and early 2022, suggesting that the market is currently tight but is likely to see significantly more production in the near future.
In the physical market, Brent’s five-week calendar spread is trading at around $ 1.50 a barrel, which is in the 93rd percentile for all trading days since 2010, confirming that the market is currently short of crude oil.
On futures, Brent’s six-month spread is around $ 3.70 a barrel, also in the 93rd percentile for all trading days since 1990, which signals traders that inventory levels remain below average.
But front-month futures prices are up less than 10% in the past two months, suggesting traders believe that significantly more crude oil could be brought to the market without much further spike.
The current mix of flat rates and spreads is in line with the view that OPEC + will significantly increase production for the remainder of 2021 and early 2022 to meet growing demand while keeping inventory levels relatively low.
Earlier this month, OPEC + members agreed in principle to increase production by 2 million barrels a day between August and December, although a final decision was blocked by disputes over production levels after April 2022.
The current price and spread constellation suggests that most traders assume that an agreement in this direction will be reached soon to ensure that the oil shortage does not worsen further (https://tmsnrt.rs/2UgQWwV).
Adjusted for inflation, Brent prices are already above their long-term averages, and cash flows are high enough to meet investments in production as well as adequate returns for shareholders and governments.
While most producers in OPEC + and elsewhere want even higher prices after the trauma of last year’s drop in prices, consumer and political scrutiny will intensify when prices rise above $ 80.
With producers holding back significant amounts of production while prices rise above $ 80, consumers and consumer country governments are unlikely to be compassionate and understanding.
Political sensitivity to rising oil prices is already evident in the pressure of the US government on Saudi Arabia and the United Arab Emirates to resolve their dispute over the production base.
In theory, US and European governments should welcome higher prices as they increase the incentive to reduce consumption and accelerate the transition to alternative forms of energy.
Higher prices would be the quickest way to encourage widespread adoption of electric vehicles, but most consumer country governments remain concerned about the impact on headline inflation and short-term policy costs.
Prices soaring above $ 80 would be increasingly unstable as producers increase production while consumers switch to alternatives and consumer country governments push cartel enforcement and energy transition planning.
In the short term, a range of $ 70 +/- $ 5 is likely to minimize friction between producers and consumers, keep petroleum competitive as an energy source, while ensuring sufficient income for investment.
This is slightly higher than the $ 65 +/- $ 5 that seemed likely in the first quarter due to the earlier and stronger recovery in oil consumption as a result of rapid global economic expansion.
The basic outlook remains unchanged, however: moderate prices minimize the friction between producers and consumers, while a further price increase will increase the pressure for a faster energy transition.