Oil Prices Heading Toward 100 a Barrel – The New

Oil Prices Heading Toward $100 a Barrel – The New York Times

Many energy analysts expect oil prices to soon rise above $100 a barrel for the first time in more than a year since unrest following Russia’s invasion of Ukraine. The price of Brent crude, the international benchmark, has risen about 30 percent since early July and was trading at about $96.50 a barrel on Wednesday.

“I think prices are starting to melt,” said Robert McNally, president of Rapidan Energy Group, a research firm.

The reason for the increase, according to analysts, is the sharp reduction in oil production brought about by Saudi Arabia last year. The Kingdom’s ability and willingness to add and subtract supplies gives it significant influence over the market for this important commodity.

Rising oil prices increase energy costs for consumers and businesses and put a strain on the global economy. In the United States, the price of crude oil is about half the price of gasoline. Rising pump prices are weighing on drivers, complicating the Federal Reserve’s fight against inflation and stoking concerns about the Biden administration’s economic leadership.

The Saudi-led oil producer group OPEC Plus, which includes Russia, is effectively withholding more than five million barrels per day, or about five percent of global supplies.

The Saudis are “starving the oil market,” said Gary Ross, chief executive of Black Gold Investors, a trading firm.

Mr. Ross said the coming weeks and months may provide the answer to why the Saudis are keeping production at about nine million barrels a day, nearly two million barrels a day less than a year ago.

“We will find out what price they want if they decide to increase the supply,” he said.

Speaking at a conference last week, Saudi Oil Minister Prince Abdulaziz bin Salman appeared to signal that Riyadh was unwilling to pump more, even as Brent crude prices were well above $90 a barrel.

While he denied that Riyadh was “inflating prices,” he said the kingdom wanted to wait until there was “data and clarity” before releasing more oil onto the market. The Saudis say they are concerned about the risk that new supplies could drive down prices while recession fears are still in the air.

It’s a tactic that, by stimulating oil production from other countries or dampening demand, could lead to a drop in oil prices that the Saudis say they want to avoid.

“Higher prices in the near term could lead to further price declines next year,” analysts at Citigroup recently wrote.

But global demand for oil has risen sharply recently and is outstripping supply.

Despite China’s slumping economy, demand from the world’s largest importer is expected to rise by a whopping 1.6 million barrels a day this year, according to the International Energy Agency, accounting for about three-quarters of total global growth.

Rapidan’s Mr. McNally estimates that global oil demand will exceed production by 1.8 million barrels a day in the fourth quarter of this year, or nearly 2 percent of the market.

This supply deficit is already causing a rapid decline in oil supplies in key storage locations such as Cushing, Oklahoma. Even if OPEC Plus begins unwinding cuts next year, as some analysts expect, oil inventories will be “uncomfortably low” and raise the risk of price volatility, the International Energy Agency warned recently.

The strength of demand is also reflected in the high profits of refineries, especially for diesel. The heavy crudes that the Saudis withhold are particularly useful for making diesel used in trucking, agriculture and industry.

Refineries that need crude for diesel are willing to pay premiums because they earn “three times the usual” profits, said Viktor Katona, an analyst at Kpler, a research firm.

In a move that will further tighten the market, Russia recently banned most exports of diesel and other fuels to help reduce domestic prices.

But it is the Saudis who have seized control of the market over the past year by orchestrating a series of cuts, including a unilateral cut of one million barrels a day from July that the prince described as a “lollipop.”

The Saudis pushed prices further higher this month when they announced that the latest production cut would last until the end of the year. Russia also promised to reduce exports by 300,000 barrels per day.

Russia benefits from actions led by Saudi Arabia. The International Energy Agency estimates that Russia generated $17.1 billion in oil export revenue in August, its highest monthly total in nearly a year.

However, the Saudis are probably not entirely satisfied with the situation. They produce well below their capacity and give up market share. Paradoxically, state oil company Saudi Aramco is spending billions of dollars to increase the amount of oil it can pump.

Mr. McNally, who served as energy adviser to President George W. Bush, said he thought the Saudis were nearing a point where they would seriously consider increasing supplies. “I think the Saudis will not intentionally let things get out of control,” he said.