October 25, 2021

Is $85.00 the new norm?

Markets began the week in an uncertain frame of mind, seemingly somewhat on edge after ICE Brent had pushed gently over $85 per barrel. Midweek saw markets ease lower as confidence in maintaining the $85 ebbed, however, EIA inventory stats on Wednesday afternoon unexpectedly gave reassurance the bull run remains in charge as U.S oil stocks dropped across the board week on week, crude oil by 400,000 barrels, gasoline by 5.4 million and heating oil by 3.9 million barrels. After the stats were published markets regained interest and some optimism for higher numbers returned. ICE Brent closed the week over $85 per barrel again.

The main price driver in this week’s stats was the fall in the level of U.S gasoline inventories. Despite US gasoline prices at the pump being over $3 per gallon (pre-Covid levels were $1.25 or so), American consumer demand is as strong as ever at just over 9.4 million barrels per day, which is surprisingly high going into winter. The American demand level is impressive but this type of trend in gasoline is also being seen outside America too as persistent West African demand and a backwardated market keep the fob Europe and Mediterranean cargo trade brisk. Naphtha demand too continues to be strong especially after Algeria’s Skikda refinery (a major naphtha supplier) continued with maintenance until late October. Mild weather is keeping distillate demand steady but not impressive.

Overall the oil market remains in a bull trend, crude oil has been flirting with an $85 per barrel price tag for a few months and finally, it hit the target, but since we arrived at this almost mythical price during the last two weeks it feels like the market is looking over its shoulder to double-check the bull trend is still in place and the gas crisis underpinning energy markets remains before attempting to set a new course to $90 per barrel and possibly beyond. The pivotal question here is becoming … “Is $85 the new norm?” As ever there is no easy answer to such a question but we will attempt a little in-depth analysis of whether it could be the case.
Banks, economists and major oil companies alike are suggesting we are in a new phase for oil prices, one where oil prices will remain higher for longer in a market on the one hand cornered by OPEC + and on the other hand a slowdown in exploration and production of fossil fuels as banks lose their appetite for such projects, their approach underpinned by the need to “save the planet” from pollution levels created from the processing and use of fossil fuels. During the last week, the biggest French banks said they would curb the financing of the shale oil and gas industry from early next year. In Ecuador, problems arose when the country had to double the number of banks that could provide it with credit guarantees as financial institutions shunned crude harvested from the Amazon. Even the board of ExxonMobil are in talks to drop several fossil fuel-based projects in Mozambique and Vietnam as they face continued pressure from environmentalists and developing government legislation to make a serious move away from fossil-based exploration.

Meanwhile, the usual suspects bring their baskets to the table, Goldman Sachs forecasts $85 for 2023 (did we miss 2022?!), Morgan Stanley revised its long-term forecast up by $10 to $70 this week and remain more cautious than most. BNP Paribas (once the leading oil financing bank) sees crude holding around $80 in 2023. A number of other banks including RBC Capital Markets have talked up the prospect of oil being at the start of a new structural bull run and they may well be right. A more cynical observer could suggest that such forecasts are projected to have a major impact on equity markets as well as the oil market price (despite sitting in the shadow of global warming). This would be a win-win scenario for the major oil companies, investors and Wall Street if they can convince the world their forecasts are right, especially given oil price expectations underpin hundreds of billions of dollars of equity valuations for major international oil companies like Royal Dutch Shell Plc and BP Plc.
In the end, it may be a mixture of price forecasts, the necessity for a high share price and a short to balanced supply/demand picture that keeps us in the middle ’80s, furthermore, OPEC+ will continue to pull the strings behind the curtains to control their portion of global crude supply, especially against a backdrop of a dwindling appetite to lend on the part of banks and investors to support new projects for exploration and production in fossil fuels.

A further twist in the game came during this weekend as Saudi Arabia announced they are committed to zero planet-warming emissions by 2060 but meantime needs to export every possible drop of crude oil they can in the decades between! In the end, influential banks and traders will forecast and predict whatever suits their book, playing the game heavily via the Wall Street route, knowing all the time they will be supported by their own captive audience who believe their every word!!

However, every few years the supply and demand balance plays its part in market structure and prices and the mixture we have today suggests $85 per barrel is quite representative of a market where supply and demand are having just as much influence as Wall Street, at least until the next batch of news stories!!

Stay safe.


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