Here We Go Again—Oil Prices on the Rise!

Just when you thought that the worst of high gasoline price spike was over, geopolitics strikes again.

So much for Sleepy Joe Biden being able to transact with the Saudis and use his influence to encourage greater production to force the price down—they ignored him. Now, for the first time since 2020, OPEC+ will meet in person and the rumour is they will reduce production by at least 1 million barrels per day.

The fact that OPEC+ members are meeting in person suggests that there will be some sort of material decision, which was enough of a rumour to send chills through the oil trading community and increase the price of oil by over USD5 per barrel. As a group, OPEC+ is already underproducing their artificially set quota so any cut by a million barrels would actually translate to much less, perhaps only 500,000 barrels.

So, why restrict supply and raise prices now? Since the post-COVID spike in prices, the average cost of oil has drifted slowly downward. Mostly this is the result of weakened demand as major economies like the US, Europe and perhaps even China enter into recessions. Even though China claims they are not in recession, GDP there has halved as they struggle with misguided policies meant to snuff out COVID.

This has meant that the oil barons were getting lower income as demand and prices reduced—not something that they like. A lot of the blame for the previous spike in prices was attributed to some of the world placing an embargo on Russian oil exports as a punitive and ultimately misguided policy to stop Putin’s Ukrainian excursion. Allegedly, this move caused oil prices to surge to over USD100 per barrel; however, as Russian oil flow actually increased, crude futures have softened and are currently at or about USD81 per barrel.

Demand and supply of Russian oil have proven resilient and the flow has not decreased; in fact, it has increased as certain parts of the world have proven that discounted oil will always find a market. A feature of the new normal is China taking Russian oil at a discount and selling their own oil at a premium, which may be a genius move by the People’s Republic.

Much of the global oil supply problem started on the first day of the Biden Presidency when he stopped the drive for America’s oil independence. Compared to last year, US production is up more than 200,000 barrels per day but this is significantly below the 2019 totals. Investment is very much lacking in the US oil production business. Companies that invest in that side of the market are very much looking for opportunities that have low environmental, social or governance risk (ESG). Right now, that pretty much excludes just about the whole of Americaland.

For now, we can expect an increase in crude prices perhaps back at the three-digit per barrel level, followed by a commensurate increase in prices at the pump. That is, until the next development occurs.