West Texas Intermediate (WTI) price opened 2022 at around $75 per barrel (bbl). Last week the price broke above $90/bbl for the first time since 2014. It was also the last year the WTI price was above $100/bbl.
As a reminder, in the first half of 2014, oil prices fluctuated most of the time between $100/bbl and $105/bbl. But the shale boom had put millions of new barrels of oil on the markets over several years, and by mid-2014 the market was approaching a situation of oversupply. The price of oil began to decline, but in the second half of the year OPEC embarked on a price war to regain market share that had been lost due to the US shale boom.
The result was that the bottom crashed in the oil market. By the end of 2014, the price had fallen to $53/bbl. The price remained depressed throughout 2015 and in early 2016 WTI fell below $30/bbl.
Related: OPEC’s No. 2 misses oil production quota
At the time, I called this episode OPEC trillion dollar miscalculation. I don’t believe that if OPEC knew how far oil prices would fall – and knew their efforts wouldn’t derail the US shale boom – that the cartel would have embarked on this strategy.
The question now is whether the current situation looks more like the first half of 2014, or if it looks more like 2011, when prices topped $100/bbl and largely stayed there for the next three years.
I would say we are somewhere in between. In 2011, the markets weren’t oversupplied, but that’s where they were finally heading. Oil production in the United States has increased by 600,000 barrels per day (bpd) year over year, but we are still 1.5 million bpd below levels just before the Covid pandemic -19 does hit the US So demand is largely back to pre-pandemic levels, we are still undersupplied from two years ago.
Last month, OPEC and its allies announced they would increase oil production by a total of 400,000 bpd in February. However, the cartel fell short of its production goals. This is helping to keep oil prices high, especially given the slow ramp-up of US oil production.
When I did my energy sector forecast last month I noted that “OPEC is still the wild card”. They want the highest oil prices the market can bear, but that’s always tempered by non-OPEC oil production. There are also demand factors that OPEC must take into account. High oil prices create incentives for alternatives, like faster adoption of electric vehicles.
So how will this all shake out? I still believe that the United States will significantly increase oil production this year, which will help moderate oil prices. It is not at all clear to me that the 17% rise in WTI price we saw in January is justified based on fundamentals.
But oil prices are always above fundamentals. WTI at $145/bbl in 2008 beat fundamentals, and the price of oil plunges deep into negative territory in 2020 beat fundamentals. And when the correction to the fundamentals happens, it can be quick.
Still, with oil just 8% off the $100/bbl mark and momentum continuing from January, it seems more likely than not that WTI will hit that level. But how long can it stay there, and where is the top of this current oil bull market? I will be among those who will be surprised if he is still at this level in the second half.
By Robert Rapier
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