Date: 07/20/2023
Author: Mr. X
Goldman Sachs’s head of oil research, Daan Struyven, said oil demand could soon reach an all-time high. “We expect pretty sizable deficits in the second half with deficits of almost 2 million barrels per day in the third quarter as demand reaches an all-time high,” he said. He predicted oil prices would reach $86 a barrel by the end of the year.
One of the reasons for this was that the supply of crude oil production would slow, down to just a sequential pace of 200 barrels per day. The American oil rig count recently hit its lowest level in 16 months. Struyven made the comments in an interview on CNBC’s Squawk Box.
My colleague Corey Snyder predicted oil prices would go far higher this year, largely because of circumstances due to the continuing war in Ukraine. That war shows no signs of ending. In fact, it may soon intensify. President Vladimir Putin recently hosted Belarussian leader Alexander Lukashenko in Moscow. He said that the much-hyped Ukrainian counteroffensive has “failed.” Even Western military leaders have glumly concluded that Ukraine has not managed to recapture much new territory, even as they try to keep up appearances in public statements. In fact, according to some reports, Russia is actually on the offensive in some areas, particularly in the northwest.
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Russia still faces problems, largely of its own making, as it cracks down on volunteer military formations in the separatist territories, partially as a face-saving measure after the embarrassing debacle of the Wagner mutiny a few weeks ago. But the war is not ending anytime soon, especially as Ukraine has been all but promised NATO membership in the aftermath. President Putin has every interest in making sure that doesn’t happen, if only for his own domestic political position.
One of the main points that Corey made in his presentation on oil is that high inflation necessarily leads to a jump in oil prices. Inflation, as President Biden has been at pains to note, is falling. However, it’s not ending, despite some of the claims of some Democrats. Inflation is still high – considerably higher than the Fed’s target. The balancing act between the need to keep the economy strong and to limit inflation will remain a challenge for the fed.
Global demand will continue to be a problem, especially as the Chinese economy continues to disappoint. However, supply will be the critical factor here. The Biden Administration has not been a friend of domestic production, but that may change in an election year. However, there will almost certainly be a strain on production, increasing prices. EOG Resources CEO Lloyd Helms recently said, “We’re a short term away from seeing the market tighten even further,” “We are more constructive on where oil prices could go.” He noted that labor and service constraints are already restricting where the company could operate.
It’s likely that supply constraints, in line with what Corey previously predicted, will be the critical factor with oil prices. While we may not see triple digit prices this year, the prediction of higher per-barrel rates seems very likely. For that reason, a move into oil drilling stocks, as well as directly investing in futures, seems like something to consider. If China steps up stimulus to get demand going again, that will only benefit the global market.
Mr. X is an investment analyst working in the Washington DC area who specializes in the intersection of business and public policy. After fifteen years working in politics, he writes on a classified basis for RogueInvesting.com to bring you news on what those with power are debating, planning, and doing
