Idle Rambling On The Price Of Oil -- March 8, 2021

Link here. 

What came / comes first, the chicken or the egg. In this case, what came / comes first, high oil prices or a recession?

Screenshot of the graphic with no markings on it. See if anything jumps out at you.

The same screenshot of the graphic with my observations:

Some other observations / comments:

• Saudi Arabia can't survive on $60 oil;
• Saudi Arabia would like oil high enough as possible without pushing global economy into a recession;
• but if survival is in question, worries about a global recession are moot;
  
• under the new US administration, US E&P companies are being very, very careful with plans for expansion;
• the new administration killed the Keystone XL; stopped drilling/fracking on federal lands; slowed permitting across the board; put the DAPL in question
• "everyone" suggests there is a real shortage of oil coming on line; there may be an excess now, but the daily production is not keeping up with projected demand;
• the interesting thing is that "everyone" has been suggesting that for several months now -- that production was not keeping up with anticipated demand, but what is becoming very interesting is that the two largest global economies, China and the US, may be coming out of the pandemic a lot faster than "anyone" predicted; see all the stories at this post; if so, it's even worse with regard to daily production keeping up with demand;
• inflation tends to push the price of oil up;
  

Everything suggests WTI will get back to $80 sooner or later. The only question is whether the price of oil will melt up, slowly and orderly, or whether it will be more of a spike.

That's why I posted the graphics above. I was curious. Does the price of oil move up/down in an orderly and controlled fashion? 

It's a fool's errand to try to predict the price of oil, but everything suggests that this time next year we may look back on $65-WTI with fondness. 

The graphic again, with more comments:

(1): the drop from $120 to $40 occurred when Saudi Arabia opened the taps in an effort to destroy US shale, what "we" call the Saudi Surge, 2014 to 2016.

(2): Saudi then put policies in play to move the price of oil from $40 to $70 before it dropped back to $60. I don't know the specifics why oil dropped back to $60 at that time, but I do know that Trump was jawboning Saudi Arabia to keep oil prices from surging -- linking US protection for Saudi with affordable oil prices. 

(3) Then the "black swan" -- Covid-19 -- completely unexpected and the price of oil plummeted from $60 to $20 (even going negative at one point). 

Going forward:

All things being equal, one would expect the price of WTI to return to where it was at (2) -- at $75 to $80 -- before Trump started working Prince MBS to bring the price of oil down. But all things are not equal. 

For one thing, we're coming out of a year-long, global "lockdown." And, on top of that, it appears we are coming out of it faster than Dr Fauci and the CDC thought possible just two months ago.

For a second thing: inflation. Treasury bonds. Yields. Commodities in general are surging and the number one commodity? Oil.

Third: Trump has that "something" that could convince Prince MBS to hold prices steady. That certainly is not true with the present administration. Even under the best of circumstances, the present administration would have very little sway on Prince MBS. But with recent "things" coming out of Washington -- specifically the Khashoggi report -- there is no love lost between the Saudi king and the US president. 

And that circles back to the fact that Saudi Arabia cannot survive on $60 oil. 

"Every" analyst was said to be surprised that Saudi -- given all the facts -- did not elect to raise production at the March meeting but twisted arms to maintain lower production for at least one more month. 

That decision may have been nothing more than wavering, not sure what to do. But one could also argue that Saudi was willing to let global oil supplies deteriorate even more, even as China and the US come out of the global recession / pandemic much more quickly than anyone imagined. 

Saudi needs $100-oil, and soon. 

I remember some years ago, a "talking head" opined that we would see $200-oil before we saw $40-oil again. That talking head was wrong then, but he/she may be right this time around.