OPEC+ ended the year by signalling that it would increase oil production from the start of January 2022, a move that appears to have stabilised the markets, at least for now, suggests Kay Rieck, an experienced market observer and investor.
This time a year ago, the price of a barrel of West Texas Intermediate oil was US$45. It’s currently a little over US$70. Brent crude has been on a similar journey over the last 12 months, closing 2020 at around US$48 per barrel and currently sitting at around US$75.
It’s not quite the US$100 per barrel that the optimists were discussing as a potential target earlier in the year, but it is significantly higher than some of the most pessimistic predictions.
Part of the reason for the stabilising price of oil is that despite the Organisation of Petroleum Exporting Countries and its partners (OPEC+) announcing that it would increase supply from the start of January, there is uncertainty whether it will physically be able to meet its commitments. Several producers in the alliance have struggled to keep up with their capacity pledges this year as a result of a lack of capacity. Doubts about supply tend to keep prices high.
The challenge for the sector is that as ever there are many different interested parties, all of which are subtly pulling in different directions. For example the US has stated that it is going to release some of the strategic stocks that it holds in reserve in response to the exceptionally high prices being endured by consumers (and voters) at the pump, while OPEC+ has been very conservative in its increases throughout the year as it tried to recuperate from a bruising collapse in demand during 2020.
While lots of different organisations having different agendas and pulling in different directions is in some ways deeply unhelpful when trying to second guess long term market direction, in many ways it is a good reminder that the oil futures market is quote efficient. It is probably fair to say that some players have too much power and they don’t always use that power in a way that could be suggested to be in the best interests of anyone but themselves. At the same time, there are very few absolutely perfect economic markets out there. The oil futures market is responsive to the fundamentals of supply and demand in the main, the problem of unresponsiveness tends to lie further up the supply chain.
The interesting thing is that some forecasters are now talking about oil reaching US$125 per barrel next year, which would be a phenomenal turn of events considering where the sector was even before the pandemic. The problem of course is what that does to the price of gasoline from a consumer point of view, not just at the gas stations but also for the cost of shipping goods internationally, aviation and the myriad of other economic activities that require oil.
The bottom line though, is that right now US$75 is a price that people can do business with.