It was a nice cross for an open goal. On Bloomberg TV, Chevron Chairman Mike Wirth was allowed to score freely this week when he was asked whether in his opinion the oil price will soon pass the 100 dollar mark. “Supply is tight, stocks are declining and the trends now show that we are heading there,” Wirth said decisively.
The benchmark US oil West Texas Intermediate (WTI) cost almost $90 per barrel on Thursday. The European variant Brent yielded about 94 dollars. Three months earlier the price was still $20 lower.
Although Wirth’s prediction comes in handy for Chevron and other oil companies, his words are hardly questioned. At the beginning of this month, major oil producers Saudi Arabia and Russia announced that they would extend their voluntary production cuts until the end of this year, keeping prices high. The Saudis have been pumping 9 million barrels a day for months; 1 million less than previously agreed. The Russians say they continue to moderate their production by 300,000 barrels per day.
At the same time, there are hardly any experts who expect lower demand for oil. When asked, Wirth from Chevron says he does not believe in a severe recession in the United States, which could lead to less demand for energy. The high oil price certainly has a depressing effect on the economy, he said on Monday, but “oil prices have been high for some time. Last year too. The economy has shown that it can deal with this.”
Demand has never been so high
According to the Financial Times Apart from the limited supply, there is another factor that could quickly push the oil price past 100 dollars. The British business newspaper sees that the role of speculators has grown rapidly recently. In the first half of September the number is lung contracts, with which they hope to respond to further increases in the price of WTI and Brent, increased by a third to 527,000.
“If the market has been going in the same direction for some time, speculation causes further acceleration by recording the higher, expected price in contracts,” says Hans van Cleef of the Public Affairs consultancy.
Crude oil prices have been rising since this summer. In mid-June Brent cost more than $70 per barrel, a month ago the price was around $85 and last Monday it was almost $95. That level has not been reached since November last year.
There are plenty of factors for a higher price: in addition to the production restrictions mentioned, the demand for oil has never been higher. In the summer, that demand was also higher than on the eve of the corona pandemic. In addition, the international energy agency IEA expects that fossil demand will reach a new peak before 2030, despite all sustainable intentions.
At the same time, the investments needed to develop new sources are still limited – and so is the ability to more easily meet the demand of almost 103 million barrels per day.
According to consultant Rystad Energy, the oil industry will invest $579 billion this year upstream, the winning. That was still 887 billion in 2014.
Australian gas
For the past fifteen years, hedge funds and pension funds have been playing a growing role in the oil market in search of high returns. Van Cleef: “Initially, the industry used futures contracts to protect itself against price developments. This is done by fixing the price for deliveries in two months’ time or, so to speak, in six years’ time.” Between those two parties, he says, numerous speculators have now become seated. “The advantage is that these financial parties provide more liquidity. If a party wants to get out of a contract, that is possible. The disadvantage is that these financial parties are driven by all kinds of noise, peripheral phenomena or speculative news. This can accelerate an already falling or rising price trend.”
Van Cleef gives an example from the gas market. There, a threatened strike in gas production in Australia will lead to more expensive European gas. “While tankers from Australia have never entered here.”
Before speculative capital arrived, supply and demand mainly determined the price of oil. “Now, especially for the short term, expectations regarding supply and demand have become much more important.”