Oil Prices Reach 2-Year High... $200 Oil Next?
The price of crude oil has increased more than 15% since April as a faster-than-expected economic recovery in the U.S. and abroad is forecast to bolster energy demand.
Yesterday the Energy Information Administration raised its 2021 prediction for petroleum and other liquid fuel consumption in the U.S. to 1.49 million barrels per day. This represents a 7% increase from the EIA's previous 2021 forecast of 1.39 million bpd.
Meanwhile, fresh OPEC supply concerns this week have now taken crude prices to over $70 per barrel — a two and a half-year high.
Responding to a recent IEA report, which suggested there is no longer a need to invest in new oil and gas projects if the world's goal is to reach net-zero emissions by 2050, energy leaders from Saudi Arabia and Russia are warning divestment in oil and gas will contribute to the supply crunch.
According to S&P Global Platts, an official OPEC report read, “The claim that no new oil and gas investments are needed post-2021 stands in stark contrast with conclusions often expressed in other IEA reports and could be the source of potential instability in oil markets if followed by some investors.”
To reporters, however, energy leaders didn't mince words. Saudi energy minister Prince Abdulaziz bin Salman said to reporters, “It [the IEA report] is a sequel of [the] La La Land movie... Why should I take it seriously?... We [Saudi Arabia] are... producing oil and gas at low cost and producing renewables. I urge the world to accept this as a reality: that we’re going to be winners of all of these activities.”
... Mic drop.
Also added to supply concerns, U.S. Secretary of State Antony Blinken said yesterday that sanctions on Iran would remain even if a nuclear deal was reached with Tehran. Blinken told reporters, “I would anticipate that even in the event of a return to compliance with the JCPOA (2015 Joint Comprehensive Plan of Action), hundreds of sanctions will remain in place, including sanctions imposed by the Trump administration.”
Further adding to domestic supply concerns is an expected decrease in U.S. crude oil production. According to the EIA, American oil production is expected to fall by 230,000 barrels per day in 2021 to 11.08 million bpd.
Consumers are already seeing the increase in crude prices reflected at the pump. According to AAA, the national average for gasoline prices is now sitting at $3.067 per gallon. That's more than 3.5% higher than gas prices were a month ago and almost 50% higher than they were this time last year.
Will oil prices continue marching higher?
It's hard to say.
Two weeks ago, Goldman Sachs said it expects crude prices to climb to $80 per barrel in the fourth quarter of this year, even with a resumption in Iranian supply.
A few days later analysts at Bank of America said they believe oil could pop above $100 per barrel.
And now some are even calling for $200 oil.
Nevertheless (borrowing a phrase in a recent Forbes article by David Blackmon) the past 10 years are littered with the bodies of analysts who've tried to predict outrageous oil prices.
The truth of the matter is that OPEC and Big Oil control the price of oil through supply. If they want prices to go higher, they cut supply. And if they want oil prices to go lower, they ramp up production.
Of course producers don't want oil prices to be too low. If oil prices are too low, they won't make a profit. But what most people don't understand is that producers don't want oil prices to be too high either.
You see, they've learned their lesson. And that lesson was: The interest in fossil fuel alternatives is proportionate to fossil fuel prices.
In other words, when oil prices get too high, people will demand alternatives.
That's bad for business.
And if oil prices get too high, those alternatives become economically viable.
That's worse for business.
So OPEC and Big Oil do have significant interest in seeing tempered oil prices. They don't want $200 oil. And they'll do whatever they need to in order to lower prices, like increase supply. OPEC has done this a million times in the past.
So at the end of the day, I think oil prices will be wherever OPEC and Big Oil want them. And that's not too high and not too low — probably in the $70 to $80 range.
Until next time,
Luke’s analysis and market research reach hundreds of thousands of investors every day. Through his work with the Outsider Club and Junior Mining Trader, Luke helps investors in leveraging the future supply-demand imbalance that he believes could be key to a cyclical upswing in the hard asset markets. For more on Luke, go to his editor’s page.
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