WTI stood at $61.50 / barrel when we issued our weekly assessment of EIA oil markets data yesterday. Nevertheless, we stated that, "We might expect WTI at $64 / barrel this time next week, and $65-66 / barrel would not be surprising." We did not need a week. Less than twenty-four hours later, WTI had surged above $64 / barrel. It could well rise far above this level, and with shocking speed.
OPEC+ decided to keep a tight limit on oil production next month, sending prices soaring in a market that had been expecting additional supply. The agreement is a victory for Saudi Arabia, which has consistently pushed to tighten the market. The cartel had been debating whether to restore as much as 1.5 million barrels a day of output. But after being urged to “keep our powder dry” by Saudi Energy Minister Prince Abdulaziz bin Salman, members agreed to hold steady at current levels -- with the exception of modest increases granted to Russia and Kazakhstan. In a briefing after Thursday’s meeting, the prince went one step further by making the kingdom’s additional 1 million barrel-a-day production cut open-ended. He gave no date for phasing out the voluntary reduction and told reporters he is in no hurry to do so.
This is exactly as we noted in our analysis three weeks ago:
If the trend holds up, the only barrier between us and $100 oil after Memorial Day will be the mood of Vladimir Putin and the goodwill of Saudi Prince Mohammed bin Salman. Both their treasuries are bare. They will be looking to refill the coffers, and not only that, but to buttress their positions against a Biden team less friendly to poisoners and ax murders than the previous administration.
Meanwhile, US shales look to sit on the sidelines a while longer. As Reuters reports from CERAWeek, the industry's leading conference:
In the past, rising prices have enticed shale companies to ramp up production even after they promised prudence, and $60 oil would have once prompted companies to rush drilling rigs and frack fleets back to work. That is not happening now. “They are not taking the bait,” [IHS Markit analyst Raoul] LeBlanc said. Private companies are likely to increase oilfield activity, but not enough to meaningfully boost U.S. output, said LeBlanc, adding that U.S. spending is likely to remain around $60 billion, flat with 2020, as companies prioritize shareholder returns. “The severe drop in activity in the U.S. along with the high decline rates of shale and the pressure from the investment community to maintain discipline instead of growth means in my view that shale will not get back to where it was in the U.S.,” said Occidental Petroleum CEO Vicki Hollub.
At some point, of course, US operators will take the bait. But too late. The Saudi decision to extend the 1 mbpd cut indefinitely can be taken as a declaration of intent -- indeed, a thinly veiled declaration of war on the Biden administration -- by the Kingdom, and by extension, the rest of the OPEC+ cartel. They are going to keep pushing prices up relentlessly. Pencil in a $10/barrel rise per month. At that pace, oil prices could reach $100/barrel during the course of the summer. That's the message the Saudis and Russians want to send to the Biden administration: "Look who has the leverage now."
Gasoline prices have already neared $4 / gallon in California and are flirting with $3 / gallon for regular on the East Coast. It will get worse. Possibly much worse.
And of course the Fed will have to raise interest rates right into the meat of the stimulus program and a still lingering pandemic.
It will get ugly.