The Great Energy Jigsaw: rising commodity price, rig count and US crude inventories

 

The oil price is on the rise and so is the US rig count – and US crude inventories - yet there are no signs of oil price reaching equilibrium, safeguarding the interests of both the consumers and producers.

The rising oil price is affecting the consumers and economists warn about an inflationary storm, engulfing the entire world that has the potential to derail the global recovery. The producers, meanwhile, are worried that the rise in price at this rate is not sustainable.

The concerns of the producers stem from a reasonable worry: although most major economies are limping back to normal, rather the new normal, the crude inventories do not reflect an increased consumption by consumers as a whole; on the contrary, it was the exact opposite, clearly indicated by the recent API and EIA data. In short, it looks like a self-induced-customer-restraint.

In these circumstances, the oil producers do not want to go through what happened during the period of 2014 – 2016.

As of Friday this week, the price of WTI and Brent stood at $82.28 and $84.86 respectively.

The US oil rig count, meanwhile, has risen significantly in proportion to the price of crude oil. Analysts, however, are far from talking about an imminent equilibrium in the crude oil markets.

One of the factors that stops analysts from making predictions is the fact that the price of gas shows no sign of going down. On the contrary, its upward march continues as President Putin of Russia has been implying in the past two weeks that he was not for turning.

Not only did he blame the energy crisis on the decisions made by the European leaders, but also made it clear that Nord Stream is the solution to the crisis, in terms of price and availability of gas for the European customers; Mr Putin has been saying that by cutting down on the distance from source to the distribution ports by 2000 km in transit, the savings can be made to be passed on to the consumers; whether the European leaders agree with Mr Putin remains to be seen.

President Putin, however, just shrugged off the accusation that Russia was weaponizing the gas shortage faced by Europe.

The shortage of gas in Europe came about as the power from renewable sources suddenly dropped unexpectedly.

In the United Kingdom, for instance, the drop was substantial in the past two months, going down from 25% of total contribution last year to just 7%.

It was due to slow winds in the North Sea. No expert saw it was coming and the government was caught off guard. It was not just in the UK, though. It happened in the rest of Europe too.

In order to compensate for the losses from the renewables, the power companies scrambled for alternatives, including the much-despised coal. This led to a sharp increase in price of coal – and shortages. Then the next alternative was on their radar – crude oil. That in turn pushed the price up of that commodity too.

Since there are no signs of winds getting stronger in the regions with high saturation of wind turbines, the demand for both coal and crude oil remains strong at present. In this context, it is unthinkable that the price of crude oil will come down any time soon.

Despite the gloom and doom, there is some good news on the horizon, though: the Chinese authorities say that the floods in the coal-producing regions have receded and life is coming back to normal. They have asked coal producers to increase the production as a matter of national urgency.

Analysts hope these measures will bring the price of the commodity down, along with that of crude oil and natural gas too – to some extent.

Oil producers, meanwhile, make it loud and clear that years of underinvestment eclipses their ambition, when they try to increase the production, demanded by major global customers.  

The developments in the energy realms come at a time when the world is not out of the woods yet. In this context, every move that the decision makers make in connection with the energy crunch is going to cause far-reaching consequences, beyond the energy sector.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

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