Whether it’s peak oil production or peak oil demand, it appears the peak theories have once again come crashing back to the market-based realities. Twenty years ago or so, I used to give presentations explaining to a skeptical crowd that the world was not going to run out of oil in the near term or even the long term. The simple explanation was that high prices would cure high prices and when they got high enough, they would find plenty of oil. This so-called finite resource would eventually be found on land and sea in places yet undiscovered. Besides 71% of the earth’s surface is covered by water so there is still plenty of oil discoveries to be made when the price is just right. That’s on top of the 1.56 trillion barrels of proved crude oil reserves, excluding oil sands that we already know about.
Of course, in the last couple of years, the so-called peak freaks have reversed course in predicting that global demand has already peaked and that we would see demand for crude oil start to fall as the world moved to more unreliable forms of alternative energy and started to drive electric cars that would be powered by alternative clean energy source or perhaps fairy dust. Yet despite spending untold trillions of dollars to force us out of our internal combustion engines and try to force investment out of fossil fuels, oil demand will hit an all-time high next month.
Yesterday it was the Energy Information Administration (EIA) that had to increase its price projections for crude oil and petroleum products for the remainder of 2024. They also had to lower their forecast for world oil production in the second quarter of 2024 (2Q24) to 101.3 million barrels per day (b/d) in March. While the EIA blames the extension of the OPEC production cuts for the reason for the change, the reality is that it was clear to most market watchers that OPEC would stay the course and extend cuts even when their last report was released. The EIA also predicts a global supply versus demand deficit, which the Energy Report has been predicting all along. The EIA says that, “the draw on global oil stocks during 2024 will keep Brent crude oil prices elevated, averaging $88/b in 2Q24, $4/b higher than we had forecast in the February STEO. Prices will remain relatively flat for the rest of the year before falling to $82/b by the end of 2025 as OPEC+ supply cuts expire and production increases.”
Yet OPEC cuts or no OPEC cuts, what this report tells you is that the only spare oil production capacity of note in the world is in the OPEC cartel. What that means is that traders buffer against supply shocks in a world where global demand is going to be at record highs and has to be at one of the lowest levels in history. That increases the possibility of sudden and violent price spikes if we see a major outage or disruption.
The EIA acknowledges the geopolitical risk factors as a wild card that could spike prices. They point out that,
“No crude oil or product tankers have been lost because of the ongoing attacks on commercial shipping in the Red Sea, but many ships are rerouting to avoid the area. Rerouting lengthens the trip and increases costs. Attacks continue to threaten ships that transit the Red Sea, which could increase prices further."
They also warn that, “Stronger demand growth than our forecast would reduce global stocks and raise oil prices, just as less demand growth would increase global stocks and reduce prices.”
Now if you look at the fact that both the EIA and the International Energy Agency have underestimated demand, this becomes a real market risk. That is especially true after the Fed seemed intent on its path to cutting interest rates.
The EIA also had to raise their gasoline price forecast as well by $0.20 a gallon for June, July and August from their last estimate as they forecast driving activity—measured by vehicle miles traveled (VMT)—will increase to all-time highs in the United States during 2024 and 2025.
Yet at the same time, they seem to pin their hopes that Biden’s electric car push will keep gas prices under control. They say,
“Despite our forecast of more driving, increased fleetwide vehicle fuel efficiency will keep motor gasoline consumption relatively flat through 2025.” Good luck with that.
So now if you look at West TX intermediate oil, a few weeks ago it was a battle to get above $80 and now it’s a battle to stay above $80. Technically the market looks ripe for a correction. It also looks like it’s consolidating, potentially setting the stage for another major upside price move. It is possible that this is going to be a staging area for a move up towards $85 and eventually testing $90.00 a barrel. Some technical analysts are pointing to the golden cross formation. Blomberg reported that the WTI crude oil approaching a Golden Cross formation with a cross of the 50-day and 200-day moving average. The last Golden Cross signal saw oil soar to its highest prices since August/September 2022.
It’s getting harder to hide the looming global oil supply deficit. And while prices may be restrained on reports of a potential ceasefire deal between Israel and Hamas, the reality is that we’re going headlong into an oil shortage. You can’t blame OPEC completely because even if they pumped all out, the corresponding drop in price would lead to a demand surge that would push us to the brink without any spare capacity in the globe. In some ways, OPEC is showing the world a favor by keeping some barrels in reserve and keeping prices elevated because, without that, we could see prices spike even higher. If you look back at it the major failure that has led us to the brink of a potential price spike has been the misguided policies of the ESG movement and the green energy movement. The government can inspire us to move in one direction or another but it has to be based on reality and market-based fundamentals.
While the diesel crack collapsed, the gasoline crack seemed to be heating up. And with the real possibility of a supply deficit building, that should keep refiners busy. The FT is reporting that the Biden Whitehouse is telling Ukraine to stop attacking Russian oil facilities. The FT says “The repeated warnings from Washington were delivered to senior officials at Ukraine’s state security service, the SBU, and its military intelligence directorate, known as the GUR, the people told the Financial Times. Both intelligence units have steadily expanded their own drone programs to strike Russian targets on land, sea, and in the air since the start of the Kremlin’s full-scale invasion in February 2022.
One person said that the White House had grown increasingly frustrated by brazen Ukrainian drone attacks that have struck oil refineries, terminals, depots, and storage facilities across western Russia, hurting its oil production capacity.” Must read
Natural gas prices really can’t get a break. Even with the late winter blast the possibility of another Freeport LNG outage is weighing on the concerns of natural gas producers as it could create another glut especially if it is an extended outage. EBW analytics reports that although Henry Hub spot prices have rebounded on increased heating demand early this week, last week’s extreme weakness may be an early warning sign for the April contract ahead of next week’s final settlement. The storage surplus vs. the five-year average, after adding 525 Bcf since late January, may finally peak this week as extreme blowtorch weather dissipates. Still, even with weather-driven demand edging higher this week and potential Bakken freeze-offs into late March, it may take several weeks to gradually erode a North American storage surplus that has ballooned to 900 Bcf. While the long-term fundamental outlook is strengthening, it will require a prolonged period of low natural gas prices this spring to maintain price-induced power sector demand and incentivize producers to keep supply off the market.