Oil prices have consistently traded below $100 a barrel so far in August, weighed down by fears of demand destruction, worries about impending recessions in Europe and the United States and the market apprehension about the economic growth of the world’s largest importer of crude oil, China.
But, barring a deep recession that would depress global oil demand, prices are likely to rise later this year and early next year, some analysts say. Most point to the very limited spare capacity of U.S. shale producers and the OPEC+ group as a key factor driving oil higher next year, even if global demand increases less than currently expected.
The impending EU embargo on Russian oil imports by sea at the end of this year should also push prices higher as trade flows will have to adjust, once again, as they have. during the first two months of the Russian invasion of Ukraine.
In the bearish camp of factors is the so-called Iran nuclear dealwhich, if accepted by Iran and world powers, including the United States, could put about 1 million barrels per day (bpd) of oil back on the market within a year.
However, just this week, the world’s largest crude oil exporter and OPEC’s largest producer, Saudi Arabia, has attempted to drive up oil prices, saying that the partners of the OPEC + group have “the means to face the challenges of the market, in particular by reducing production at any time and in different forms”. Then there’s the end of US Strategic Petroleum Reserve (SPR) releases, which are currently scheduled to end in October. The end of SPR trims could further tighten the oil market ahead of winter as utilities in Europe and Asia switch from gas-fuel to fuel-oil production due to unusually high natural gas prices .
Slowing economic growth and a possible Iranian nuclear deal are pushing prices down. But the shift from gas to oil, OPEC+’s drive to cut production again, very low global spare capacity, the end of SPR releases and continued US shale discipline are all bullish for oil prices. .
A mild recession may not wipe out oil demand growth, many analysts say.
Due to the very low spare capacity, “even if demand turns positive at all, even to a small extent, then I think you’re ready for much, much higher prices,” said Neal Dingmann, managing director. of energy research at Truist Securities. Yahoo Finance Live this week.
“Domestically, whether it’s oil or gas, these companies have very, very limited incremental capacity right now,” Dingmann said, adding that with the surge in demand for LNG in Europe, the largest gas producers in the United States “will continue to print money”.
Referring to global spare capacity, the energy expert said that “in all of OPEC+, including Saudi Arabia, there is not the spare capacity that people perceive.”
Dingmann thinks oil could drop to $80 a barrel this year and then climb to $110 a barrel early next year, mainly due to limited spare capacity for oil and gas production around the world. .
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This week, Saudi Arabia said OPEC+ was ready to cut production if necessary, its energy minister, Prince Abdulaziz bin Salman, said in an interview with Bloomberg.
“Markets cannot reflect the realities of physical fundamentals in any meaningful way and can provide a false sense of security at times when spare capacity is severely constrained and the risk of severe disruption remains high,” Prince Abdulaziz bin Salman said. . speak Saudi Press Agency.
This vicious circle of low liquidity and extreme volatility in the paper oil market “is amplified by the flow of unsubstantiated stories about demand destruction, recurring news stories about the return of large volumes of supply, and the “ambiguity and uncertainty over the potential impacts of price caps, embargoes and sanctions,” Saudi Arabia’s largest oil company said.
Prince Abdulaziz bin Salman said the OPEC+ group would soon start working on a new deal beyond 2022 and that “we are determined to make the new deal more effective than before.”
With this Bloomberg interview also published by the official Saudi Press Agency, Saudi Arabia is sending a strong signal to the market that it will continue to manage oil supply (read: oil prices).
If a recession does not hit global oil demand severely, oil prices could resume their rally, as OPEC+ could counter a comeback in Iranian oil with further cuts, while Russian supply with the oil embargo EU could fall.
By Tsvetana Paraskova for Oilprice.com
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