Last month, Israel conducted an air strike on Iranian top military brass in Syria. Iran responded with a barrage of drones, cruise missiles and ballistic missiles—almost all of which were intercepted. These events could cause a spike in Brent and WTI prices—but the duration of such a spike may be short-lived.
If we do see a dramatic escalation in tensions resulting in either of those scenarios, a price spike as high as $100/bbl is very possible. For comparison’s sake, WTI was near $86/bbl and Brent was near $90/bbl in mid-April.
Is an oil price spike to three figures a barrel a good thing for producers? Not so, in my opinion, at least in the long term. Price spikes, such as WTI moving into the $100/bbl area, are normally short-lived from a demand perspective because global economies tend to contract very quickly in response to these higher prices. For example, travel demand tends to drop suddenly, and near-term inflationary cycles kick back in with higher interest rates, eventually leading to a hard-landing recession.
OPEC+ production
Another factor to consider is OPEC+. In March, OPEC+ said it would extend its output cuts of 2.2 MMbbl/d into the second quarter. Although that decision was widely expected, the announcement also included Russia’s decision to cut its oil production and exports by an extra 471,000 bbl/d in the second quarter, which was a surprise to many.
Given these production cuts, OPEC+’s spare capacity is nearly 20% above their normal average. This means they have 20% more production they could add to the market if they need to—that is, if they decide to eliminate these voluntary production cuts. Higher oil prices could very easily encourage them to make that decision, which would bring that spare capacity, totaling approximately 6 MMbbl, onto the market.
Follow natural gas?
There’s also the record production of U.S. and Canadian crude to consider versus the level of global demand. In 2023, the U.S. and Canada produced more oil and gas than any other region, including the Middle East. Then, in February of this year, U.S. crude oil exports reached an 11-month high. Some analysts believe the global spare capacity is somewhere near 6 MMbbl/d. If oil prices spike to triple digits, we probably will learn the accuracy of these estimates, as any spare capacity will show up very quickly.
The old saying that the cure for high prices is much higher prices in the near term may ring true once again. Just look at natural gas. Two years ago, it traded near $10/MMBtu. In mid-April, that figure was $1.68/MMBtu. Is crude on the same path? Only time will tell, but producers should be aggressive in locking in desirable crude oil prices on this abnormal market strength.
Recommended Reading
US Asks Venture Global LNG to Justify Filing of Confidential Documents
2024-03-13 - The FERC request comes days after Venture Global LNG customers had challenged the company's request for a one-year extension of its startup and urged the regulator to make Venture Global release the confidential commissioning documents.
FERC Again Approves TC Energy Pipeline Expansion in Northwest US
2024-04-19 - The Federal Energy Regulatory Commission shot down opposition by environmental groups and states to stay TC Energy’s $75 million project.
Venture Global Gets FERC Nod to Process Gas for LNG
2024-04-23 - Venture Global’s massive export terminal will change natural gas flows across the Gulf of Mexico but its Plaquemines LNG export terminal may still be years away from delivering LNG to long-term customers.
Despite LNG Permitting Risks, Cheniere Expansions Continue
2024-02-28 - U.S.-based Cheniere Energy expects the U.S. market, which exported 86 million tonnes per annum (mtpa) of LNG in 2023, will be the first to surpass the 200 mtpa mark—even taking into account a recent pause on approvals related to new U.S. LNG projects.
Watson: Implications of LNG Pause
2024-03-07 - Critical questions remain for LNG on the heels of the Biden administration's pause on LNG export permits to non-Free Trade Agreement countries.