Commodities’ King Sees “Structural Supply-Side Commodity Inflation” Sending Oil To $200

As Omicron anxiety fades (and even morphs into talk of the end of the pandemic phase of COVID), oil demand fears have faded and crude prices have ripped back higher, erasing any losses enabled by Biden’s SPR Release headlines also…

And pushing WTI back up to its highest levels since 2014…

So where does oil go next?

Oil to $100

Easy, Putin thinks so!

It is “quite possible” that the WTI Crude oil prices reach $100 per barrel in light of growing global demand for energy commodities, Russian President Vladimir Putin said on a CNBC panel at the Russian Energy Week in October.

Asked by CNBC’s Hadley Gamble whether the US benchmark could hit $100 a barrel, Putin replied “That is quite possible.”

Additionally, Trafigura, one of the world’s largest independent oil traders, affirmed Putin’s thinking, noting that recovering global oil demand could send oil prices to $100 a barrel, despite COVID challenges to demand.

Oil to $200?

Building on that theme, Russian and OPEC ministers warned last year that if the ‘Net Zero By 2050’ plan is enacted, “we’ll see $200 oil.”

If the world were to follow the International Energy Agency’s controversial road map, which said investment in new fields would have to stop immediately to achieve net-zero carbon emissions by 2050, “the price for oil will go to, what, $200? Gas prices will skyrocket,” Russian Deputy Prime Minister Alexander Novak said.

The “euphoria” around the transition to clean energy is “dangerous,” Qatar’s Energy Minister Saad Sherida Al Kaabi said at the St Petersburg International Economic Forum in Russia in June.

And after a magnificent year in 2021, commodities trader Doug King, who manages the $244 million Merchant Commodity Fund, said oil could soon hit $100 and even $200 over the next five years due to a lack of exploration and investment to maintain existing supplies.

“We believe in structural supply-side commodity inflation that most will not have ever seen — the highest since the 1970s,” he said in an interview.

“Only OPEC will react to price metrics and they are undershooting every month.”

As Bloomberg reports, OPEC and its partners are gradually increasing crude output after making deep cuts of almost 10 million barrels a day in 2020 when the pandemic first struck. While the group is meant to be pumping an extra 400,000 barrels a day each month, many of its members are struggling to reach their quotas.

“In practice, a lot less oil is making its way to the market,” the Merchant Commodity Fund said in its investor letter.

“Its members are simply unable to return to pre-covid levels of output. This is all down to a lack of investment.

Within the 23-nation OPEC+, the “only real spare capacity” resides in Saudi Arabia, the United Arab Emirates and Kuwait, according to the letter. Even Russia, which leads OPEC+ along with the Saudis, can’t pump much more.

“It’s no state secret that Russia is at, or very near, its maximum,” the letter said.

“If not next month, then certainly by April it may not have any more barrels to give.”

Goldman Sachs is “extremely bullish,” citing low spare capacity among oil producers

And in fact, as we detailed previously, a number of traders are already placing bets on oil hitting $100…

And even $200… These are bets that WTI will hit $200 by Dec 2022…

“I haven’t seen crazy strikes like this in a long time,” said Mark Benigno, co-director of energy trading at StoneX Group Inc., referring to the price in the underlying asset at which the options become exercisable.

“The momentum and trend is higher.”

And finally, what about Oil to $300?

It’s possible… as we detailed previously, whether you think global warming is a hoax and no technology has done more to uplift billions of people out of abject poverty than the harnessing of fossil fuels, or you think the burning of fossil fuels is irreversibly destroying the planet and urgent action to halt their use should be the top priority of humankind, or even if you think both of these things, this article is for you.

I can assure all sides the following: unless something substantial changes – and soon – the price of oil is going way higher… just ask NatGas buyers in Europe. On an energy-contained-in-oil-equivalency basis, natural gas prices reached the following levels in February:

SoCal Citygate: $835 per barrel

Chicago Citygate: $752 per barrel

Houston Ship Channel: $2,320 per barrel

Waha: $1,196 per barrel

OGT: $6,919 per barrel

Henry Hub: $137 per barrel

Agua Dulce: $528 per barrel

Sure, the price of natural gas didn’t stay there, but it went there. I use this extreme example to illustrate an important point. Fossil fuels are hugely inelastic commodities. Shortages send prices soaring because they are needed and there are not yet fungible substitutes. Society might hate fossil fuels, it might even hate them for very good reasons, but society is trapped in its need for fossil fuels, at least for the time being.

Indeed with quotes like these…

We see a shift from stigmatization toward criminalization of investing in higher oil production.” – Bob McNally, former White House official, “This Time Is Different” Bloomberg May 30, 2021

From today, halt all investment in new fossil fuel supply projects and make no further final investment decisions for new unabated coal plants.” – IEA Roadmap to Net Zero by 2050

Perhaps $100, $200, $300 crude is not so far away.

There is at least one person who is hoping that Doug King is wrong as we wonder just what would happen to the president’s approval rating if Gas prices at the pump reached $4 (at $100 WTI) or $7 a gallon (at $200 WTI)…

Source: Bloomberg

Better start making some more calls Joe?

Tyler Durden
Fri, 01/14/2022 – 13:32

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