Does $70 Oil Make Sense???
October 6, 2022
Much to our utter surprise, the price of oil dipped into the $70s in late September leaving us scratching our heads as to what are these energy traders thinking!? The precipitous decline in the price of oil as dramatically depicted in this graph doesn’t make any sense to those who follow global affairs.
Let’s take a look at some basic facts:
- OPEC+ has shown remarkable self-discipline by keeping its quotas tight. Thus, the raw fundamentals of supply and demand – real consumers and real producers – point towards a tightening market.
- Since March, the Biden Administration has been peeling off oil out of the Strategic Petroleum Reserve (SPR) for more than a half-year as a way to bolster domestic supply and, thus, tamp down domestic gasoline prices that were spiraling into a politically unacceptable level. It’s still going on. (We will leave until another day a commentary on the appropriateness of meddling with the SPR to deal with domestic inflation matters.)
- Despite record profits, most US-based oil companies have not appreciably increased their rig counts year-over-year. Some notables (Pioneer) are flat YoY.
- The embargo on Russian energy is working in terms of BOPDs not exported. (We’ll leave to another commentary the nuances of the silver lining that the Ruskies have been enjoying.) The US et.al. is not stepping-up-to-the-plate sufficiently to replace it. Moreover, transportation infrastructures have to undergo major modifications to facilitate new patterns of suppliers and consumers.
- $70 oil seems to discount the impacts of a purported worldwide recession. But, it is nowhere to be seen.
So, the price of oil has abruptly taken off early in October as have many sectors of commodity and financial markets – our question is this: What new news emerged in the last 3 business days that justifies a major rally in oil prices? Our view is that maybe those smarty-pants oil traders had time over the past weekend to review market fundamentals and have opted to reverse their bearish positions.
Indeed, the pendulum on prices could swing violently upward. Take a look at this New York Times article about that SPR. Among the many interesting points made in there, it raises the issue of what happens to the pricing of crude oil once the Biden Administration gets around to replenishing the SPR inventory. And, since then, OPEC+ announced an unexpected roll-back in quotas.
In sum, we at First Keystone view the fundamentals of producing and selling oil and natural gas as favorable in the short-term as well as fundamentally sound in the intermediate term. Certainly, the worldwide market for natural gas is undergoing radical changes. We are doing our bit to aid in that process by leasing industrial buildings in Pecos (TX) to serve the oil industry’s needs.
The opinions expressed above reflect only those of the author and do not represent those of the First Keystone Pecos Industrial Park organization. First Keystone welcomes responsible fact-based discourses on these topics.