ANS breaches $80s
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OPEC+ holds gradual production bump as US hints strategic reserve draw
A dramatic run-up that took Alaska North Slope crude above $80 per barrel cooled off a bit Oct. 6. ANS dropped $1.73 to close at $81.18, while West Texas Intermediate lost $1.50 to close at $77.43 and Brent lost $1.48 to close at $81.08.
Russian President Vladimir Putin said his country will ride to the rescue of European energy markets by pumping more natural gas, which would ease the need to replace the fuel with oil for heating and electric generation this winter.
Brent prices have surged more than 50% in 2021, while natural gas prices expanded to a record peak in Europe and coal prices also hit all-time highs.
U.S. commercial crude oil inventories for the week ending Oct. 1 increased by 2.3 million barrels from the previous week, against analyst expectations of a 418,000-barrel drawdown, according to U.S. Energy Information Administration reports released Oct 6. At 420.9 million barrels, oil inventories are about 7% below the five-year average for this time of year.
Total motor gasoline inventories increased by 3.3 million barrels for the week but remain about 1% below the five-year average for this time of year, the EIA said.
Oil prices continued modestly lower at the end of the trading day following comments by U.S. Energy Secretary Jennifer Granholm to the Financial Times suggesting that the United States could ease prices by releasing oil from its strategic reserves or restricting crude exports.
Oil prices continued to slip in early trading Oct. 7, with Brent briefly hitting $79.95. As Petroleum News went to press, Brent was above the psychologically important $80 mark, seen as the level where prices begin to affect consumer demand.
OPEC+ sparks price appreciationAll jawboning aside, the market staged a strong reaction to the discipline of the Organization of the Petroleum Exporting Countries and its allied producing nations, including Russia.
At its 21st OPEC and non-OPEC Ministerial Meeting Oct. 4, OPEC+ resisted calls from the United States and other consuming nations to step up the return of production volumes, sticking instead with its existing plan to increase oil exports gradually.
OPEC+ will increase exports by 400,000 barrels per day in November, as per the schedule approved in July.
U.S. shale producers are not expected to respond with dramatically higher production to offset the OPEC+ restraint, being focused on reducing debt and improving profitability as oil markets improve.
Prices took off after the OPEC+ announcement Oct. 4. ANS leapt $1.87 to close at $81.49, WTI popped $1.74 to close at $77.62, and Brent jetted $1.98 higher to a close of $81.26.
The surge continued Oct. 5, as ANS rose $1.43 to $82.91, WTI rose $1.31 to $78.83, and Brent rose $1.30 to close at $82.56. The WTI price was the highest in seven years.
After prices jumped on the OPEC announcement, Saudi Arabia reduced crude prices for Asia, its biggest market, and cut prices for nearly all grades headed for the United States, the Mediterranean and Northwest Europe, according to a Bloomberg report.
$180 oil in 2022?Houston based consultancy Opportune LLP thinks oil prices have the potential to rise dramatically higher than current levels, with WTI hitting prices of $180 or more by the end of 2022.
The culprits are hyperinflation spurred by COVID-19 stimulus spending, and the Biden administration’s climate agenda.
According to Opportune, quantitative easing in response to the 2007 credit crisis put $3.5 trillion into the economy, stimulating the stock market artificially. As the S&P rose, however, the velocity of money slowed, showing that the economy never fully recovered from that crisis.
Enter the coronavirus pandemic, and the Federal Reserve has injected an additional $3.5 trillion.
“What took five years to do with QE was now duplicated in less than a year, this means that we currently have around $7 trillion of government-directed stimulus floating in the system,” Opportune said. “The worst part is that an additional $6 trillion of the COVID/infrastructure bill is currently being debated in Congress. Not only are these numbers staggering, but the rate at which it hits the economy is ripe to spur hyperinflation.”
With such a rapid expansion of the money supply, it is only a matter of when hyperinflation will hit, Opportune analyst Ryan Dusek said, adding that commodity prices are up across the board, and Bloomberg’s commodity index which tracks futures prices is at a six-year high.
“In addition, several of my internal models are currently valuing West Texas Intermediate crude oil in the $90 per barrel range,” Dusek said.
In one simple economic model, the relationship between the Dollar Index and the velocity of money, VM1, is used to guide expectations about future WTI prices, he said.
“Given the government’s insatiable thirst for spending, it’s not unreasonable to assume a negative and a new low (less than 70) for the DXY index,” he said. “Therefore, I would expect WTI to trade north of $180 by the end of next year.”
Dusek said that with the existing and potential levels of unprecedented stimulus, the economy is operating in uncharted waters.
“The government won’t correct its course until it’s forced to do so; hyperinflation “breaks” their game,” he said. “They’ll be stuck between increasing rates to slow price inflation and decreasing rates to spur recovery. The only alternative remaining is to reduce the money supply and accept all the painful ramifications that will result from it.”