An inconvenient number: when will oil cost $ 100 a barrel and why it is not profitable

Forbes published a column by Marcel Salikhov, President of the Institute for Energy and Finance Foundation, “An inconvenient number: when will oil cost $ 100 per barrel and why it is not profitable”.

Since the beginning of the year, oil prices have already risen by 50% and recently exceeded $ 75 per barrel - this is higher than the levels before the pandemic. Such a powerful rally allowed experts to assume that $ 100 can be expected in the near future. Such predictions have been made by some traders, and recently analysts at Bank of America predicted that prices will become three-digit by the end of 2022.

Now such a scenario looks quite possible, at least the current factors contribute to it. The global economy is rapidly recovering, quarantine restrictions in the United States and Europe are being lifted, and population mobility in many countries has returned to normal. At the same time, stimulating measures from both monetary and budgetary policies, in most cases, remain. US President Joseph Biden proposes massive infrastructure spending. China continues to increase government spending, although it plans to gradually phase out fiscal stimulus.

All this creates conditions for the growth of prices for all commodities. In this sense, the dynamics on the oil market this year does not differ much from the situation with other types of raw materials. In addition, oil prices are helped by the seasonal increase in demand in the summer months.

Deceived expectations

A number of factors that restrain the growth of supply in the oil market also contribute to the rise in prices. The OPEC + deal continues to operate while maintaining a high level of discipline among the participating countries. The agreement itself effectively limits the supply - by about 6 million barrels per day.

A few months ago, many experts considered it probable that sanctions against Iran would ease, which would lead to a sharp increase in the Iranian oil supply to the market. However, Tehran continues to negotiate with Western countries on the resumption of the nuclear deal, and no major breakthroughs are expected. The victory of the conservative candidate Ibrahim Raisi in the recent presidential elections in Iran is likely to further complicate the achievement of agreements.

In previous periods of price increases, shale companies in the United States actively took advantage of the opportunity and increased production. This is not the case now. Under pressure from investors, shale players are more focused on reducing debt and improving financial performance than on increasing production. The number of rigs deployed has almost doubled from August 2020 lows, but remains half of pre-pandemic levels. As a result, US oil production in recent months has remained stable, unresponsive to rising prices.

Supercycle opponents

All this creates the preconditions for a rise in oil prices in the near future. In the context of the continuing deficit on the world market, prices may well jump up to $ 100. Especially if this is helped by another round of tensions in the Middle East or disruptions in the transportation of raw materials. Yet this price level is not sustainable.

Some investment banks suggest that a new price super cycle has begun on the commodity markets. The main arguments are the following: a surge in economic growth against the backdrop of the end of the pandemic, maintaining a soft monetary policy in developed countries, additional budgetary spending on infrastructure. Moreover, rising inflation may force investors to hedge their risks by investing in commodities. This creates positive feedback and gives rise to long-term price increases.

But the higher oil prices go, the more factors will start to drive the opposite movement. The cyclical nature of commodity markets is precisely due to the constant imbalance between the current price dynamics and the long-term response from the supply and demand side. If we analyze the cost of new projects in oil production, we can see that many will be attractive to investors with a price range of $ 40-60 per barrel. The same American shale companies will be able to reduce debt levels within a couple of years and start increasing production again.

Limited influence

For Russia, a spectacular $ 100 a barrel will fundamentally change nothing. The current fiscal rule limits the impact of oil prices on the exchange rate. Against the backdrop of rising oil prices, the dollar exchange rate may drop below 70 rubles, but will no longer reach the 2013-2014 values ​​memorable to Russians - 30-35 rubles. The main beneficiary of the rise in prices is the federal budget, which will direct additional contributions to the National Welfare Fund. Oil companies will also receive additional financial benefits, which will have the opportunity to increase investments and dividends. Under this scenario, the Russian economy does not have to wait for really significant consequences, for example, an increase in growth rates