Amid widespread fears of an oil price spike this summer, another storm is brewing on the horizon: the oil shock will not end in 2022. It will almost certainly continue into next year.
The International Energy Agency will release its first look at the balance between oil supply and demand in 2023 on Wednesday – marking the start of the annual pivot as investors increasingly focus their attention on the following year. . Already, silver has been pouring into the December 2023 Brent contract, taking its price near $100 – a clear sign that traders see the tight market lasting. The outlook for higher oil prices for longer will add to global inflationary pressures and erode margins for manufacturing companies.
While everyone is waiting for the IEA’s forecast, commodity trading companies, oil companies, OPEC countries and Western consumer nations have already calculated their numbers. Their consensus for oil demand in 2023 ranges from an additional 1 million barrels per day to 2.5 million barrels per day. By 2022, it is expected to have increased by 1.8 million barrels per day, according to the IEA, to around 100 million. Generally, anything above 1 million per day of annual demand growth is considered quite robust. The supply side doesn’t look much better. At best, oil traders expect Russia to maintain its current level of around 10 million barrels per day, down about 10% since its invasion of Ukraine. But many believe it could lose another 1 million barrels, or even 1.5 million barrels. The OPEC+ cartel, which started 2022 with sufficient spare production capacity, is also reaching its own limits. “With the exception of two or three members, all are at maximum,” OPEC Secretary General Mohammad Barkindo said last week, referring to Saudi Arabia and the United Arab Emirates. The result is likely the third straight year of a drawdown in existing oil inventories – and that’s after a precipitous decline in global crude and refined product inventories over the past 18 months. So far this year, Western governments have mitigated the impact of falling supplies by releasing the most barrels of their strategic oil reserves. Without further action, the emergency releases will end in November, removing the biggest cushion in the market. Another problem is the refining sector. The world is effectively running out of spare capacity to turn crude into usable fuels like gasoline and diesel. As a result, refiner profit margins have skyrocketed, meaning consumers are paying far more to fill their tanks than oil prices suggest. : Three barrels of West Texas Intermediate crude are refined into two barrels of gasoline and one of distilled fuel, such as diesel. From 1985 to 2021, the spread of crack — the spread between the price of crude and refined products — has averaged about $10.50 a barrel. Last week, it hit an all-time high of nearly $61. Very few new refineries will come on stream over the next 18 months, suggesting that crack spreads could remain very high for the rest of the year and into the news. The outlook for 2023 has big question marks – and most of them concern government action. Each can alter supply and demand by 1 to 1.5 million barrels per day, more than enough to swing prices significantly. The most important is the duration of the oil sanctions against Russia, themselves linked to the invasion of Ukraine. The others are China’s zero Covid policy, Western sanctions against Iran and Venezuela, and the release of strategic reserves. Oil shocks are usually remembered by their magnitude. But that’s only half the story; the other half is their duration. And that’s where the outlook for the 2023 forecast matters most. The latest spike in oil prices was brief. After a slight price increase throughout 2007 and early 2008, the recovery accelerated in May 2008, with prices climbing above $120. In July, oil prices peaked at $147.50, but by early September they had fallen below $100. Brent was trading below $40 in December 2008.
So far, the oil price rise of 2021-22 has been a carbon copy of that of 2007-08. Frighteningly, the price charts follow an almost perfect synchronization. But any hope that the oil market is about to follow the pattern of what happened 14 years ago misinterprets reality. Oil prices are not about to collapse. A better analogy is the period between 2011 and 2014: Oil prices never revisited the 2008 high but still remained above $100 almost continuously for over 40 months. Brent has already averaged $103 a barrel in 2022, above the 2008 annual average of $98.50 a barrel. The next six months could see even higher prices. But more important is how long these prices remain high. For now, there is no end in sight.
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This column does not necessarily reflect the opinion of the Editorial Board or of Bloomberg LP and its owners.
Javier Blas is a Bloomberg Opinion columnist covering energy and commodities. A former Bloomberg News reporter and commodities editor at the Financial Times, he is co-author of “The World for Sale: Money, Power and the Traders Who Barter the Earth’s Resources.”
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