More than supply and demand in play for oil prices

  • Oil and gas rigs dot the Permian Basin around Loco Hills, northeast of Carlsbad, N.M. More factors than traditional supply and demand are currently driving oil prices and that makes for an uncertain outlook for producers. (Photo/Tribune News Service)

Predicting what the prices of oil and natural gas will be in the next few months requires the weighing of several factors besides just supply and demand.

Oilmen Kirk Edwards and Frosty Gilliam, economist Ray Perryman and professor Dennis Elam say fluctuations of the pandemic, the whimsy of OPEC and OPEC+ and the policies of the Biden administration and the Environmental Protection Agency must also be considered.

“The price of oil will do exactly what Saudi Arabia wants it to do,” Edwards said. “For some reason during the pandemic, they allowed themselves to keep oil off the market, which reduced inventories and steadily let the price go up from $30 a barrel at this time last year to close to $70 today.

“They’re trying to limit how much product they put on the world market. With all the COVID setbacks that there have been in so many different countries and now with the new Delta variant coming around, we’re seeing Saudi Arabia produce half as much oil as they were a year ago and make the same amount of money.”

Edwards said the Mideast nation “can drop the price right back down to $30 if they want to, but luckily we have hedging instruments to protect ourselves with, though only for a year or two.”

He said gas prices have been just as volatile, falling to minus-zero last year but rebounding to around $4 per thousand cubic feet. Two years ago, the price was $1.30.

“It’s been so low for the last four or five years, again because the world market was flooded,” said Edwards, whose Latigo Petroleum is heavily invested in gas production in the Texas Panhandle. “There’s not a lot of gas coming onto the market now and that has caused its price to increase.”

The July 18 OPEC+ announcement that it would bump monthly production by 400,000 barrels per day fomented a drop from the mid-$70s to the upper $60s that had partly corrected to the low $70s by mid-week.

“Anything they say is probably a lie,” Edwards said. “They’re just trying to keep the Permian in check so we don’t put out a bunch of rigs.”

Asked if the domestic industry has considered cutting production to exert more control on prices, he said the Texas Railroad Commission called a meeting of representatives in March last year to discuss prorations, but before action could be taken, “The Saudis did it for us.

“They took two million barrels a day off the market.”

Thirteen nations belong to the Organization of Petroleum Exporting Counties. OPEC+ has 10 more, led by Russia.

Gilliam said the coronavirus factor “will potentially continue to depress travel and projects and indirectly affect fuels and energy, which would cause supply to outgain the demand.

“OPEC always tries to play the role of the leader and they’ll want to dictate what the price does,” he said. “The political realm certainly trumps a lot of the practical sciences of oil prices.

“Supply and demand should dictate it, but historically attitude and the perception of what might happen end up weighing heavily. All that adds up to a real likelihood of lower prices.”

Gilliam said the industry is very uneasy about the Biden administration.

“The standard Democrat play is to limit drilling and increase regulations, which make the cost of doing business increase,” the AgHorn Operations president said. “Keeping drilling projects from occurring on federal lands and offshore adds up to a damper on supply and production.”

Perryman, an Odessan whose consulting company is based at Waco, Texas, said the recent oil setback stemmed from the OPEC+ announcement and a spike in coronavirus cases domestically and abroad.

“As always, there is a lot happening in oil markets that creates a lot of noise,” he said. “The virus is clearly the biggest wild card at the moment. If it reaches the point of substantially slowing global demand growth, then the price will likely fall for an extended period. We cannot get the economy fully on track till the health crisis is manageable.

“Assuming we avoid another widespread surge, demand is growing faster than supply, even with the OPEC+ increase, and prices should enjoy an upward trend for the next few months. Global demand is back to about 97 percent of pre-pandemic levels and travel and production are both enjoying substantial growth.”

Perryman said a new consumption record will happen next year if there isn’t another crisis with the virus.

“Although the domestic rig count has approximately doubled, it remains below prior levels, and oil field service employment, despite impressive recent gains, has only recouped about 20 percent of the lost jobs,” he said. “There’s a lot of room for growth and the market outlook is positive; but as we have said about so many things for so long, it all depends on the virus.”

Elam is an associate professor of accounting and finance at Texas A&M University-San Antonio and an Odessa American columnist who writes about the energy industry.

“Demand for natural gas in the Far East is still on the rise, making that market stronger,” Elam said. “The fact that refiners like Valero are turning away from carbon-based oil to vegetable oil for so-called clean diesel may keep gasoline prices fairly high.

“I expect oil to stage a 50 percent recovery, which is where it is today, and then fall to the lower $60s in August.”

Elam said President Biden’s order to stop construction on the Keystone Pipeline from Canada caused more expensive rail shipping from the Dakotas.

“The great irony is that Biden forced gasoline prices higher by shutting down Keystone, not to mention the EPA’s general war mongering,” he said.

“So gasoline goes above $3 just as America comes out of COVID, when people want to travel. Now he has to ask the Mideast to export more oil and bang, we’re back to depending on that region again.”

However, Elam said inflation and a rise in consumer prices may be held down if oil and stocks have peaked and are starting to decline.

“That would be deflationary,” he said. “Which will it be? I’m seeing headlines that the economy slows from here and I’m guessing that stocks have topped.”

Referring to options contracts that give owners the right to sell a certain amount of their underlying assets at a set price within a specific time, he said: “Many had sold puts and they had to either buy the puts back or sell futures.

“It looks like they sold futures. Financial shenanigans have a lot more to do with oil price volatility than supply and demand.”

Updated: 
08/04/2021 - 11:58am