OPEC, SPR May Make $80 the New $60 for Oil
Comment of the Day

September 21 2022

Commentary by Eoin Treacy

OPEC, SPR May Make $80 the New $60 for Oil

This note from Dow Jones may be of interest.

Tightly managed supplies by the OPEC-plus group and signs Washington will start restocking crude siphoned off from its Strategic Petroleum Reserve if oil falls to $80 suggests oil prices will stay relatively high despite a global economic slowdown, BofA Global Research says. "As spare capacity dwindles and capex lags, we think $80/bbl is now the new $60 for Brent crude oil," it says in a note. "Said differently, the 'OPEC-plus put' on average oil prices is higher today." It adds that a recent signal by OPEC-plus to reduce production even as oil traded above $90 was unprecedented, and a good indication it'll do what it takes to keep a floor on prices.

Eoin Treacy's view

The USA is now an energy exporter. It no longer has a vested interest in permanently lower prices. Viewed from that perspective, the Norwegian policy suite comes into sharper focus.

Norway relies on hydro for most of its electricity production. That option is not open to the USA but domestic demand for natural gas will increasingly have to compete with global demand as LNG becomes a globally fungible commodity. That will be doubly true as new exporters become less reliant on fixed term contracts. Afterall, that was the practice more than a decade ago when consumers needed to be convinced of the need to build the necessary infrastructure. Today, the need is self-evident.

Norway has more EVs per capita than any other country. It can afford to and has a small population. It remains to be seen if the USA will ultimately adopt the EV model. It’s a much bigger country and pickup trucks are still the #1 best seller.

It makes sense to conserve domestic demand for oil when surpluses can be exported at a premium. However, the cost of EVs will need to come down for that to be practical and there is a significant push/pull in the commodity supply chain that is a not allowing that to happen. Tesla is talking about releasing a $25000 hatchback at some stage but the $35,000 Model 3 now costs $40,390 for the base model.

The harsh reality is sales of EVs are exceptionally reliant on government subsidies. Together with carbon credit, these are the only rationale for why companies are making them.
West Texas Intermediate is currently trading at $83 so the market appears willing to test the US government’s resolve to support prices at $80.
The SPDR Energy Fund continues to pause in the region of the 200-day MA.

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