CRUDE OIL HITS $80, HIGHEST SINCE 2014 – COULD REACH $100 AS OPEC+ CONTROLS PRODUCTION TO MILK DEMANDS
West Texas Intermediate (WTI) crude futures, the U.S. oil benchmark, crossed US$80 per barrel on Friday – the highest since November 2014. The Brent crude, the international benchmark, had already breached US$80 mark days ago. And it appears the oil price will continue skyrocket as WTI is on track for its 7 straight gains week, its longest weekly winning streak since December 2013.
The pressure on gas supplies saw a surge in prices, even though European Union said they have sufficient gas in storage to last through winter. As China is forced to ration power due to near-record high thermal coal prices, it has ordered coal miners in Shanxi and inner Mongolia – its two biggest coal-producing regions – to ramp up annual production capacity by more than 160 million tonnes.
Even India is facing power crisis because demand for power jumped sharply as the country’s economy picked up after a deadly second wave of Coronavirus. While power consumption in the last 2 months shot by almost 17%, the global coal prices increased by a whopping 40%. To make matters worse, 70% of the electricity in India is generated using coal.
But the primary reason the crude oil goes “BOOM” is because OPEC (Organization of Petroleum Exporting Countries) and allies led by Russia have refused to add more oil than the initial agreement of raising production by a modest 400,000 bpd (barrels per day) in November, despite the recent fuel shortage. Without Donald Trump around, the OPEC+ is back to its old game.
If Trump is still the president, he would most likely unleash some tweets, warning and ordering Saudi Arabia to pump more oil to bring down the price. And if Saudi deliberately drags its feet, Trump would threaten to tap the Strategic Petroleum Reserve. Or he would trumpet new oil deals that may not exist in the first place, just to spook the crude oil market.
Under President Joe Biden, nothing is done to stop exploitation or manipulation of oil production, which together with excessive speculation, would send crude oil prices to the roof, as can be seen now. It was only on Wednesday that the U.S. Energy Secretary Jennifer Granholm said Biden administration was considering tapping the country’s emergency oil reserve.
Despite White House’s calls to OPEC+ to ramp up production, OPEC+ announced on Monday that it would only gradually add supply to the market – suggesting that Saudi, the de-facto leader of OPEC, has very little respect for “Sleepy Joe”. If the clueless U.S. president does not do something fast, some analysts said a cold winter could send oil prices to above US$100.
Goldman Sachs predicts the Brent crude could easily reach US$90 per barrel by the end of December. Meanwhile, Bank of America said oil could hit US$100 per barrel because the energy crunch has gone global. At US$100, it would roughly translate to US$4 per gallon at the station (US$4.17 was the all-time high for gas prices after oil prices hit US$145 per barrel in 2008).
Yes, US$100 per barrel is absolutely possible. Saudi and Russia are leveraging on the current global energy crisis, along with a weak and indecisive Biden administration, to control production and milk the oil revenue as much as possible, after a difficult year during Coronavirus pandemic. Saudi wanted to reduce its budget deficit to 1.6% of its GDP in 2022 with the help of high oil prices.
The plan is to slowly milk the profit from the black gold. However, OPEC+ has to be very careful so that the crude oil price does not spike too fast and too high as it could destroy economic recovery. Saudi has been cutting its crude oil selling price for Asian buyers following the price rise in an attempt to grab market share and to retain its dominance.
So, the good news is, even if the crude might jump to US$100, it would not sustain. While it’s true that the global economy is recovering from Covid-19, it is not strong enough to accept such a ridiculous price. Besides, Saudi has to compete with the U.S. oil producers. The total number of oil and gas rigs in the U.S. count is now at 533, up 264 from the same time last year.