Oil prices on the rise amid signs of distress heading into winter

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Goldman Sachs seems to think oil prices could hit $100 per barrel by the end of the year.

So do many consumers, fearing further inflationary pressure on costs that have risen across the commodities landscape this year.

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Oil inventories lag heading into winter

Brent crude oil price chart

SodelVladyslav/Adobe Stock

Global oil inventories are certainly showing signs of distress as we head into the winter season.

A recent Reuters post summarizes the inventory dilemma explaining global liquid fuels consumption fell by around 2.1 million barrels per day (bpd) in September compared with the same month in 2019, as a result of the pandemic. Yet, over the same period, global production fell by 2.8 million bpd pushing the market into deficit.

Commercial petroleum inventories jumped by 335 million barrels during the first wave of the pandemic. However, inventories have since shrunk by 425 million barrels because of the strong rebound in the global economy and restrictions on output. As a result, by September, OECD commercial inventories reached 145 million barrels, down 5% below the level two years ago.

OPEC+ output

OPEC+ has been raising its output by 400,000 bpd each month. Despite calls by President Joe Biden, among others, to raise output further, it has so far refused to do so. OPEC+ has cited uncertainty over the global recovery and the risks of further pandemic-related restrictions to growth as reasons to be cautious about increasing output further.

In reality, OPEC+ is playing true to its historical card, preferring periods of higher prices during which its members enjoy better returns if they think prices could ease in the long term.

So far, US shale producers have failed to fill the gap in the way they did in the last decade. Like OPEC+, shale drillers’ shareholders are preferring better returns than investing in increasing output. Shale oil and gas producers also claim that while current prices are profitable, inflationary cost pressures make the cost of a significant increase in drilling activity insufficiently attractive.

The EIA predicts OECD inventories will increase next year, but only by some 85 million barrels. That leaves inventories at only 2.83 million barrels by the end of 2022, the lowest since 2014 prior to this.

There are a few potential disrupters.

Iran could achieve a breakthrough in talks with the West over its nuclear deal. As a result, Iranian output could increase but with a hard-line new administration in place, progress is glacially slow and the prospects look slim.

Growth and, hence, demand could slow faster than expected. China is certainly slowing both in terms of construction activity and output. According to Trading Economics, September’s GDP growth came in at just 0.2% compared to 1.2% for the same month last year. But whether the drag of power supply disruption will persist through the winter remains to be seen.

What does seem clear is OPEC+ has no intention of increasing output for the benefit of consumers.  High pump prices are likely to remain through well into next year.

Will oil hit $100 per barrel?

It’s a stretch. However, further upside is certainly possible.

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