High Oil Price: the perfect boomerang to haunt producers too!

 

High oil price - perfect boomerang

We, both analysts and mere mortals, who passionately follow the oil and gas markets, have been saying for months that the current crude oil and gas prices are way too high to be sustained. 

Having come under pressure on many fronts, the OPEC+ agreed to increase the production by 648,000 bpd for July and August, leaving a huge question mark over the collective production quota for September - and beyond. 

It looks like they exercised extreme caution before making the next move while taking into account the ground realities. 

Of course, setting targets is one thing; achieving the very targets, judging by the data from some members of the OPEC+ in the recent past, is easier said than done, though.

Analysts think that the OPEC+ does not underestimate the impact on the global economy due to high fuel prices - finally; the latter may have feared a fall in demand as a result, if major economies end up in the feared cyclic recession. 

They have realized that they are not immune from the tidal wave of inflationary pressure, after all, when it is no longer a speck in the hypothetical realm on the horizon.

The recent measures taken by two major oil producers in the Middle East speak for themselves.

Saudi Arabia, the world's top oil exporter, for instance, has allocated $5.3 billion to help its own struggling families in the Kingdom due to high cost of living that stems from high global prices; King Salman has issued a directive - in a royal decree - in this regard, according to Saudi Press Agency (SPA) on Monday.

The UAE President, Sheikh Mohamed bin Zayed Al Nahyan, meanwhile, has allocated $7.6 billion in order to help low income families in the emirate to deal with the soaring living costs.

The countries in the Gulf are importing most of their food items: the UAE, for instance, import 80% to 90% of its food from the rest of the world; as for Saudi Arabia, the figure is estimated to be 80% with the rest being locally produced in the vast country. 

source: tradingeconomics.com

The rising oil prices have triggered off a chain reaction in the form of price hikes at many different levels that in turn make the oil producers feel the pinch too - at last.

In this context, the global oil producers are fully aware of the risks associated with the rising fuel costs unless it is nipped in the bud - before it is too late.

In short, the oil producers have to strike a balance when it comes to the insatiable appetite for revenue generation at the expense of the billions of consumers worldwide and increasing the production in line with the global outcry to do so. 

By increasing the price of  crude oil for Asia in these circumstances is like destroying the last straw that a drowning man clutches at, in a life-and-death situation.

In the region, Sri Lanka, for instance,  is officially declared bankrupt with virtually no oil left in its refineries; in addition, the prices are skyrocketing while squeezing the citizens in all walks of life ; In Pakistan too, the oil prices are on the rise on daily basis, perhaps, in order to meet the demand of the IMF for an urgent bailout. 

Analysts fear the list may grow if the current commodity prices remain for a long period. When this happens, the reverberations will be felt across the world as the national economies cannot exist in isolation.

If the issue is not addressed urgently , the boomerang of rise in oil price will choose the same path  in reverse to haunt the senders in the long run.

The Western leaders have been begging of the Middle Eastern oil producers to do more to boost production for moths. President Biden's forthcoming visit to Saudi Arabia may be a part of the same plan, although his administration has not been explicit about the real goal. 

In response, the oil producers have been simply saying that the ball is not in their court, citing the lack of investment and storage facilities for their inability to play their role in the balancing act.

There is some truth in it, indeed. The EIA, US Energy Information Administration, recently talked about a little known metric in the oil sector, partially supporting the position taken up by the Middle Eastern oil producers.

The metric in question is global surplus crude oil production capacity.

 

The EIA defines the surplus production capacity as the maximum capacity that can be brought online in 30 days and sustained for at least 90 days. 

Global surplus crude oil production capacity

The EIA says that the metric has gone down by more than 50%, among both OPEC+ and non-OPEC+ members,  implying the inability of the producers to increase the demand on a whim, while coming under pressure from many quarters. 

Since the global oil demand has reached the pre-pandemic level, in the absence of uninterrupted supply, the prices are going to go up, reflecting the existing market sentiments.

The war in Ukraine and the ban on Russian oil as a consequence, have inevitably become a serious factor in the supply-demand equation. 

In addition, the dangerously-evolving political landscape in Libya, one of the top crude oil producers in the region, is creating more obstacles against the smooth flow of the vital commodity. 

With the contribution to the global supply of crude oil by Iran and Venezuela remaining next to nothing owing to the current political impasses, the prices of crude oil are going remain in three digits for the foreseeable future; an arbitrary dip in price, as happened during this week, is just a flash in the pan with no anchors to hold the  ground beneath.