A month ago, any analyst suggesting international oil prices could soar all the way to $200 per barrel would have been laughed out of the studio. Now, some are beginning to acknowledge that this is a real possibility, and with good reason.
Oil and fuel exports from the Middle East stood at 25.13 million barrels daily in February, Reuters reported this month, citing data from Kpler. By mid-March, this had plummeted by close to two-thirds, to 9.71 million barrels a day. Vortexa has even more worrying figures, putting the February daily average at 26.1 million barrels of crude and fuels, and the mid—March average at just 7.5 million barrels daily.
Yet even worse than daily shipments is the situation in production. Everyone in the Middle East is cutting oil production—and those wells take a while to restart. The reason they are cutting is that storage capacity is limited—and some of those “export” barrels are actually going on tankers for storage rather than shipment to clients. A fifth of global oil, in other words, is severely disrupted, and even if the bombs stop flying tomorrow, it will take a while for things to get back to normal.
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Iraq has reportedly curbed oil production by some 2.9 million barrels daily, ING commodity strategists said in a note earlier today. In Saudi Arabia, the cuts are to the tune of between 2 million barrels daily and 2.5 million barrels daily. The UAE has reduced production by 1.5 million bpd, and Kuwait has slashed output by a reported 1.3 million barrels daily. That makes a total of over 7 million barrels daily gone.
For context, the International Energy Agency had predicted the oil market would this year be in a surplus of around 3.7 million barrels daily. Not only is that now gone—if it was ever here at all—but there is more supply frozen because of the crisis. Indeed, the IEA itself estimates shut-in production at 10 million barrels daily.
What all this means is that there is no physical oil to respond to demand. And when physical supply is tight, prices fly high and take a while to go back down if the situation normalizes, even accounting for the destruction in demand that high oil prices would inevitably cause.
“We’re very much in the $150 range but I don’t think it’s ridiculous at all to [suggest] $200. It would be very fair given we are basically having a crisis-a-day right now equivalent to supply outages,” Onyx Capital Group CEO Greg Newman told CNBC this week, noting that the Middle Eastern oil benchmark had already hit $150 per barrel amid the supply squeeze.
“I wouldn’t be surprised if oil went to 200 bucks, or even 250, because commodity prices go parabolic when there’s a shortage of supply,” the chief market strategist of Longview Economics, Chris Watling, told the news outlet.
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Not all analysts are this bullish, of course. In fact, many forecast a reversal of oil’s fortunes after the end of March, with Brent crude slipping below $100 and WTI falling below $90. These, however, are based on an assumption of a fast end to the hostilities, and there aren’t many signs that this is a real possibility at this point. And the longer exports out of the Persian Gulf remain constrained, the more production the Middle East would have to shut it and the longer it would take to restart it.
Reuters’ Ron Bousso noted this in a column on the $200-per-barrel scenario, saying that even if the war ended, prices would come down, but they would not come down all the way to pre-war levels because of the physical oil shortage. Therefore, Bousso wrote, “traders may want to think twice before betting that the return to normality Trump has promised is coming anytime soon.” Restoring the suspended production could take months.
Perhaps the main reason Brent has not yet hit $200 is, ironically, the amount of sanctioned Russian barrels that Washington de-sanctioned temporarily to help plug the growing gap between supply and demand. According to maritime transport trackers Windward, as of March 16 there were 197.8 million barrels of Russian crude in transit globally, “reinforcing ongoing pressure on maritime logistics networks.”
These barrels, however, would only offer temporary relief, which is why China has banned fuel exports and ordered Sinopec to cut refining rates by 10%, even though it has the largest volumes of oil in storage in the world. The news that Iraq and Kurdistan had finally reached an agreement to restart oil exports via the Kirkuk-Ceyhan pipeline also won’t make much of a difference: it only has a capacity for up to 250,000 barrels daily.
A scenario that only a month ago would be called insane is now a real possibility. That said, however, the possibility is still quite distant. Given the pain that $200 Brent would cause every single economy in the world, chances are, cool heads would eventually prevail.
By Irina Slav for Oilprice.com
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