Oil price not yet at peak
Now that oil prices have approached the 100 dollar mark again, the question arises as to how much is left in the barrel. Demand still exceeds supply, causing inventories to fall for more than a year. OPEC+ is gradually ramping up production, but the reality is that it is lagging behind previous promises. Sometimes because countries do not want to, but much more often because they simply cannot produce more. Despite the high oil price, investments by oil companies lag behind. One of the larger shale farmers in the United States indicates that even at 200 dollars a barrel, he does not intend to invest more. The rising interest rates also play a role in this, since many shale farmers are rather heavily financed. It is therefore unlikely that the oil price will be driven down in the short term by additional supply, or Iran would have to return to the oil market soon. So that means that the oil price can only be slowed down by a drop in demand, and for that, the price will have to go up further. In that respect, there is still enough room for a higher oil price.
Climax Ukraine
At the moment, we are close to a climax in the crisis surrounding Ukraine. Putin has actually got his way on several fronts, without there being any victims on the Russian side. Moscow has more to say in Kazakhstan and Belarus, Germany and France think that Putin has legitimate objections against NATO expansion, there is a division within NATO, there are few countries that want to support Ukraine militarily, so Putin has a better negotiating position with Kyiv and thanks to the renewed friendship with China, it is now the United States that is being isolated. As one of the largest oil exporters and an important supplier of gas to Europe, Russia has the best cards in its hand; no economic sanctions can compete with that. The conflict with oil producer Russia has pushed up gas and oil prices. This would mean that when peace returns, prices will fall.
More demand than supply
Yet the downward potential seems limited. This year, for the first time in history, demand for oil exceeds supply. This is significant because in the past, OPEC+ and especially Saudi Arabia always had spare capacity. Since the oil price halved from $100 to $50 a barrel after the invasion of Crimea in 2014, many investments have been put on hold. First because of the low oil price, then mainly because of the energy transition. Central bankers are telling commercial banks to be careful about financing fossil fuels. Western oil producers are bombarded by demonstrators and angry investors. Some even went so far as to decide to sell their entire position in fossil fuel companies. In one case, the courts were even called upon to push through a more sustainable policy. Despite all this pressure not to invest, the same parties apparently have no problem in consuming oil. The demand for oil is greater than ever, and the energy transition is not visible in the statistics.
Drawing on stocks
April is historically the best month for oil prices. Prior to the ‘driving season’, demand increases during the summer period. This year, there will be an additional demand impulse post-Omicron. Demand for paraffin in the United States is now only 10 percent below the pre-pandemic level, while US oil production is more than 10 percent below the pre-pandemic level. The fact that the market share of OPEC plus Russia has increased is not a good signal either. In the past, oil prices always rose when OPEC gained market share. Stocks have been cut for more than a year, first by an average of 1.9 million barrels a day, and since November by 1.2 million barrels a day.
Demand remains strong for the time being
Even if investment were to increase due to the high price of oil, it would still take many years before production increased. With little chance of an increase in supply, it will have to come from the demand side. The demand for oil is fairly inelastic, but somewhere there is a pain barrier. The previous peak in the oil price was 147 dollars a barrel in 2008. At that time, petrol prices in the United States rose to USD 4.09 per gallon. Adjusted for inflation, that would now be $5.21 per gallon. To get gasoline prices above $5 a gallon, oil prices would have to rise above $150 a gallon. Energy consumption in Europe is 3 to 4 percent of GDP. The historical peak was reached in the 1970s, when 10 percent of GDP went on energy. In this respect, there seems to be plenty of room on the demand side, also because, precisely because of the high gas and oil prices, consumers in many European countries are being subsidized to continue consuming. And we already spend twice as much on fossil fuel subsidies than on alternative energy subsidies. The only ray of hope is that higher oil prices will eventually increase the supply of alternative energy.
