Brent Oil price has been trying to make new highs since it reached $135/bbl. on March 8th following the Russian invasion of Ukraine. Russia being the one of the world's top three producers with 10 mbpd production, there was valid concern whether or not they would stop exporting their oil to the rest of the world. This at a time when global oil demand had been running very strong into Q1 with a system that was constrained to grow given the transition to clean and sustainable energy that had been on every CEO's agenda.
Since then Brent fell to $96/bbl., only to rally once again to $120/bbl., and then fall back down towards $105/bbl. after the White House made the announcement last night that they were looking to release more oil from the Strategic Petroleum Reserve, this time by 1 mbpd over the next six months. The past SPR releases proved to be quite futile in cooling the oil price strength, but will this time be different?
The oil market has moved in many cycles since the U.S. Shale boom back in 2012. Since U.S. Shale came into existence, the market dynamic along with the players and swing producers changed altogether. U.S. Shale was seen to one of the "easiest" types of oil to bring onto the market as prices rose and switch off as they fell. But since Covid hit in March 2020, U.S. Shale lost about 2 mbpd of oil production which has yet to come back especially given WTI moved up 1200% from its lows of $10/bbl. all the way up towards $120/bbl.
Ordinarily if WTI went above $50/bbl. this would have given them enough incentive to ramp up production, but they have resisted this time, rather held off as they have had their wrists slapped by their investors who pressured them not to overspend, but instead return cash back to shareholders. This along with governments pressuring them to transition away from fossil fuel towards much more sustainable forms of energy, shifted their stances towards more expensive investments in renewables than ramp up "old" production.
Low and behold today when prices are threatening to choke the economy, the same government is asking their companies to ramp up? Needless to say, the global oil market is still down about 2mbpd of oil since 2020.
After suffering heavy losses back in 2020 when oil prices collapsed, the OPEC+ alliance, which actually includes Russia as well, has been extremely prudent in bringing the entirety of the 10 mbpd of production cuts back onto the market. They have stuck to their plans to release 400k bpd every month over the past year, regardless of oil price swings. This has aggravated the U.S. as their pledges no longer seem to have any effect on OPEC as they did before. Of course, OPEC did the right thing as these price spikes were nothing to do with demand. After the sanctions put on Russia, minus the oil and gas exports of course, the market priced in about 3-5 mbpd of Russian oil being taken out of the market.
But this once again proved to be too aggressive as countries like India and China bid up cargoes at a steep $30/bbl. discount, defying the U.S. SWIFT sanctions do make it harder for Russia to sell their products, but it is just being redirected, and Putin knows fully well that Europe cannot stop its gas imports as it relies too heavily on Russia. So, these sanctions don't really restrict them, in fact Russia is making quite a bit of money from these higher commodity prices.
There is only one cure for high prices, and that is even higher prices, which is where we got to as that is the tipping point when demand chokes off. We were bound to get there prior to the war but the invasion got us there faster. Prior to the invasion the economy was dealing with extremely stubborn inflation and slowing economic growth as a central bank that had run out of firepower was now focused on raising rates and tightening liquidity.
As prices spiked across the board, inflation is spiraling out of control which is causing economies to cut back demand. Demand is the one factor that is constantly changing. Tracking supply side and projects is quite easy over a certain period of time. At extremes, the market often tends to exaggerate both on extreme demand or extreme weakness, and we all know what then follows.
The U.S. SPR release of 1mbpd comes at a time when Ukraine is close to a ceasefire with Russia, OPEC+ is releasing more oil, and when global demand is showing signs of cooling off. Commodity markets move in cycles; it's all about timing. It's important to track both demand and supply as that is what it takes to reach a price equilibrium rather than let our emotions get the better of us claiming $200 or $300/bbl. oil.