A headline in the June 8 edition of The Wall Street Journal could have been pulled from mid-2013: “Traders Bet on Return of $100 Oil.”
The article went on to say how traders have gobbled up call options tied to oil reaching $100/bbl by the end of next year, suggesting they are betting the current demand-supply imbalance is here to stay for awhile. That narrative could easily be read as déjà vu all over again.
For the first time since early 2008, oil prices hit triple digits in 2013, topping out at nearly $109/bbl in September and hovered around $100/bbl over much of the first half of 2014, until the flood of production overwhelmed the thirst for crude. Prices steadily eroded, eventually sinking to $29.13/bbl in January 2016, a low that was eclipsed, of course, when Covid did its thing with demand.
There are, however, some stark differences between the environments of then and now, which suggest an encore may not be in the cards. For one thing, eight years ago, investors were eagerly handing over cash, which operators were just as eager to spend to keep their pipelines and storage tanks full. Those same investors now demand fiscal discipline, insisting on increased returns over higher production. Even as the U.S. benchmark West Texas Intermediate (WTI) hovers around $70/bbl, producers, for now at least, are bowing to their shareholders. The Energy Information Administration (EIA) estimates that U.S. oil production will increase only modestly from an average of 11.1 million bbl/day this year to 11.8 million bbl/day in 2022.
Then, there are today’s deep-pocketed money people, who are kneeling to societal and government pressure to eliminate or at least slash carbon intensity and, therefore, want nothing to do with any investment related to fossil fuels. Between activist shareholders and the courts, super-majors like Royal Dutch Shell and ExxonMobil have been forced to cut their carbon footprints, suggesting they are unlikely to contribute anywhere near their historical production levels. Even the International Energy Agency (IEA), traditionally an industry cheerleader, said that to meet the global target of net-zero carbon emissions by 2050, operators must immediately stop any new oil and gas exploration.
A likely unintended side effect of this anti-oil sentiment is a premium on the barrels that are produced, which, in turn, raises inflation concerns. This is just as the U.S. economy is recovering from the ravages of the pandemic. “The recent sharp gains in commodities have of course fueled investor jitters over rapidly rising inflation,” Rystad Energy Oil Market Analyst Louise Dickson warned in a June 17 note. “Oil prices are not fully protected from inflation, and $75 per barrel oil is certainly far above the cost of marginal supply, so the concern over inflation is valid.”