Oil prices have consistently traded below $100 a barrel so far in August, hit by fears of demand destruction, worries about looming recessions in Europe and the US and market apprehension due to the economic growth of the main importer of crude oil in the world, China.
But short of a deep recession that would sink global oil demand, prices will rise toward the end of this year and early next year, some analysts say. Most point to very limited spare capacity, with both US shale producers and the OPEC+ group, as a key factor that will push oil higher next year, even if global demand grows less than is currently expected.
The EU embargo on Russian maritime oil imports later this year is also expected to push prices higher as trade flows will have to adjust, once again, as the two first months of the Russian invasion of Ukraine.
In the bearish camp of factors is the so-called Iran nuclear deal, which, if Iran and world powers, including the US, agree, could put around 1 million barrels per day (bpd) back on the market ) of oil on the market in a year.
However, this week the world’s top crude exporter and OPEC’s top producer, Saudi Arabia, tried to talk down oil prices, saying OPEC+ members have “the means to deal with to market challenges, such as reducing production at any time and in different ways.” Then there is the end of releases from the US Strategic Petroleum Reserve (SPR), which is currently set to end in October. The end of SPR launches could further tighten the oil market before winter, while utilities in Europe and Asia are switching from gas to diesel generation due to exceptionally high natural gas prices .
Slowing economic growth and a potential Iran nuclear deal are driving prices down. But the switch from gas to oil, OPEC+ readiness to cut production again, very low global spare capacity, the end of SPR launches and continued US shale discipline are bullish for the oil prices.
A mild recession may not wipe out growth in oil demand, many analysts say.
Because of very low spare capacity, “even if demand is positive, even in a small way, I think then you’re set for much, much higher prices,” said Neal Dingmann, managing director of Research energy from Truist Securities. Yahoo Finance Live this week.
“Domestically, whether it’s oil or gas, these companies have very limited incremental capacity right now,” Dingmann said, adding that with increased LNG demand in Europe, major US gas producers “will continue to print money”.
Referring to global spare capacity, the energy expert said that “at all levels of OPEC+, including Saudi Arabia, there is not the spare capacity that people perceive there is.”
Dingmann thinks oil could fall to $80 a barrel this year, but then rise to $110 a barrel early next year, largely because of limited spare capacity for oil and gas production globally .
Related: What’s Behind Buffett’s Renewed Interest in Occidental?
This week, Saudi Arabia said OPEC+ is ready to cut production if necessary, its energy minister, Prince Abdulaziz bin Salman, said in an interview with Bloomberg.
“Markets fail to reflect the realities of physical fundamentals in a meaningful way and can give a false sense of security at times when spare capacity is very limited and the risk of severe disruptions remains high,” the prince said. Abdulaziz bin Salman, as stated. by the Saudi Press Agency.
This vicious circle of thin liquidity and extreme volatility in the paper oil market “is amplified by the flow of unsubstantiated stories about the destruction of demand, recurring news about the return of large volumes of supply, and ambiguity and uncertainty about the potential impacts of price caps. embargoes and sanctions,” Saudi Arabia’s top oilman said.
Prince Abdulaziz bin Salman said the OPEC+ group will soon start working on a new deal beyond 2022 and that “we are determined to make the new deal more effective than before.”
With this Bloomberg interview also published by the official Saudi news agency, Saudi Arabia is sending a strong signal to the market that it will continue to manage oil supply (read: oil prices).
If a recession does not severely affect global oil demand, oil prices could return to recovery, as OPEC+ could counter the return of Iranian oil with further cuts, while Russian supply with the embargo EU could fall.
By Tsvetana Paraskova for Oilprice.com
More top reads from Oilprice.com: