Can the Oil prices reach $150/barrel?

Synopsis:
Oil prices will likely approach $100 in 2023 due to demand and production cuts. This impacts global inflation and stock markets. U.S. oil dynamics might shift with predictions of high prices into 2024.

Oil prices have always significantly affected global economies and financial markets. Oil prices are on track to reach $100 a barrel this month for the first time in 2023 after surging by almost 30% since June this year, after Russian and Saudi Arabian production cuts and rising demand from China. Recently, Oil prices increased to a level that is close to a 10-month high in the past few days.

This is mainly due to tighter supply projections and The Organization of the Petroleum Exporting Countries (OPEC) optimism regarding the sustainability of energy demand in significant nations.

Opec+ is a group of 23 oil-exporting countries which meets regularly to decide how much crude oil to sell on the world market. Opec nations produce about 30% of the world's crude oil. Saudi Arabia is the biggest single oil supplier within the group, producing more than 10 million barrels a day.

Brent crude nears $100/barrel, at a 10-month high.

Why do oil prices matter?

Impact on the Economy

Inflation

Rising oil prices can lead to increased transportation costs, resulting in higher prices for goods and services, potentially causing cost-push inflation.

Consumer Spending

Rising gasoline and heating costs can reduce consumer spending, slowing economic growth and increasing trade deficits for oil-importing countries.

Impact on the Economy

Production Costs

Industries dependent on oil may face higher production costs and reduced profitability if they can't transfer these costs to consumers.

Petrodollars

When oil prices rise, the demand for the U.S. dollar can increase since oil transactions are typically in dollars.

“It could impact inflation, and it could impact consumers because they only have some amount of disposable income. If they must spend more on things like Gasoline, then they are not spending on other things, so it is only a matter of time before one can see the elevated oil prices impacting the economy”, says Yahoo Finance

Impact on the Stock Market

Sector-wise Impact

Oil price increases benefit oil explorers and producers, but hurt airlines, transportation, and manufacturing.

General Market Sentiment

Prolonged high oil prices dampen market sentiment, leading to stock market declines.

Oil and US Dollar

The United States has historically been a net importer of oil. Rising oil prices cause the United States trade balance deficit to grow as more dollars are needed to be sent abroad. However, something has changed.

The United States became a net exporter of refined petroleum products in 2011 and has now become the largest producer of crude oil, overtaking Saudi Arabia and Russia, thanks to technological advancements.

Top oil producers in 2022 (in 1,000 barrels/day)

The rise in global energy demand, especially from Asian markets like China and India, provided a ready market for U.S. oil exports. Instabilities in major oil-producing regions, such as the Middle East and Venezuela, led to decreased production and exports from these areas. This created an opportunity for U.S. producers to fill the gap in the global market.

According to the Energy Information and Administration (EIA), the United States is about 90% self-sufficient in total energy consumption.

Crude oil and the US dollar often have historically seen an inverse relationship, meaning that when the value of the US dollar decreases, crude oil prices tend to increase, and vice versa. This is because crude oil is priced in US dollars, so a weaker dollar means it takes more dollars to buy the same amount of oil.

US Dollar Index vs Oil Price

However, Now, due to the change times the strong inverse relationship between oil prices and the U.S. dollar might become more unstable due to changing times as you can view it in the chart.

Outlook for Oil in Future

“For the near term, one can expect the prices to be around the $90 range because Saudi Arabia (part of OPEC) needs to fund internal projects, and they want the price of oil to be higher, specifically with the unilateral production cuts they have done “, by Yahoo Finance.

The U.S. Energy Information Administration's Short-Term Energy Outlook (STEO) for July 2023 predicts higher crude oil prices in the latter half of 2023 and 2024. This is due to moderate but consistent inventory drawdowns.

Forecast

Inventory Drawdowns

There's an expected average inventory drawdown of 0.4 million barrels per day (b/d) from July 2023 to the end of 2024. This is attributed to OPEC members' production cuts and an anticipated petroleum consumption increase.

Global Consumption

Forecasts for global petroleum consumption have been slightly increased, especially in non-OECD countries, rising to 56.5 million barrels/day in 2024. China and India are leading this growth in consumption.

Closing Remarks

Oil prices in 2023 highlight the balance of global supply and demand. With groups like OPEC+ making key decisions and countries like the U.S. changing their roles, the oil market remains unpredictable. Understanding these shifts will be crucial for businesses and consumers as we move forward.

Interview of Vijay Valecha, Chief Investment Officer with CNBC Arabia