Commodities, in particular crude oil, is a boom and bust industry. Anyone who has speculated on oil -- or has been a part of the oil industry -- will tell you, the highs are euphoric, and the lows are tragic. It was not that long ago that consumers were enjoying low energy prices, politicians were patting themselves on the back, small oil producers were filing for bankruptcy at an alarming rate, and large producers were delivering massive losses to shareholders. Like clockwork, the pain in the oil patch felt in 2020 led to less investment in production and a lower supply of fossil fuels. Accordingly, we've seen prices press wildly higher, but what seems to be getting lost in the narrative is the fact that high prices are curing high prices ... it just happens to be unfolding at a much slower pace than consumers and politicians would like.
The only thing I know about commodities after all these years of following markets is high prices bring supply. In this situation, small oil producers have picked up a lot of slack. It is the smaller operations that don't have to answer to shareholders or even politicians. Assuming they can get financing, which has been a challenge for both risk and social reasons, they can fly under the radar in hopes of participating in the price surge. U.S. oil producers have increased the number of oil rigs in operation to over 600 from a 2020 low of 172. Further, domestic production is roughly 12 million barrels per day, which is only a million shy of the all-time high production seen in early 2020. Despite the rhetoric and target production cuts, OPEC is also nearing the early 2020 production levels. The world is currently receiving about 30 million barrels per day from OPEC vs. 32 million before the pandemic.
Equations have two sides; in economics, we must also pay attention to demand. Just as the supply of crude oil on a global scale has mostly recovered to pre-Covid levels, demand has also recovered. In fact, according to the U.S. Energy Information Administration, both supply and demand for 2022 are expected to be near 100 million barrels per day. This is similar to the equilibrium seen in 2019, which saw little volatility in the price of oil. West Texas Intermediate, or WTI, crude oil futures spent several months trading between $50.00 and $65.00. Much lower than the general range of $80.00 to $95.00 we are seeing now with a comparable supply/demand picture.
In addition to the assumption that elevated oil prices will continue to incentivize production, we are finally seeing signs that the supply chains are healing. Like other industries, oil drillers faced challenges in obtaining the chemicals, tools, machinery, and pipelines needed to extract and transport products to introduce them to the marketplace. More efficient access to these resources will go a long way toward increasing the supply of oil and gas while putting downward pressure on price.
The crude oil futures chart seems to be lined up with what we are seeing within the aforementioned fundamental story. According to charts of various timeframes, including the daily chart displayed, the price of oil "should" be contained by resistance in the mid-to-low-$90s. The longer prices fail to break above resistance, the more likely they are to succumb to gravity, which should drag oil to a more historically comfortable price range which we estimate to be closer to $65 than $95.
