Oil prices: ‘Beware of recession and recession’

Even before the Russian aggression in Ukraine, the raw materials world in general, and the oil world in particular, were tormented by powerful inflationary flows. If anyone blamed us for a strong post-Covid recovery or logistical bottlenecks, this first inflationary contribution was primarily monetary (a poorly calibrated stimulus from central banks that, instead of funding real investment, especially in Europe, fueled growth ). almost all assets, including thus commodities and metals, which have all been financed) as well as physical due to under-investment in existing oil fields and new ones in recent years (2014 market downturn, zombie companies in shale, update renewable energy policies have weakened exploration programs).

With sanctions against Russia and, in particular, a ban on the import of Russian hydrocarbons to the UK and the US, should we expect oil prices to be $200 or $250 per barrel? First of all, we recall that all countries, even producers or theoretically self-sufficient ones, keep buying abroad. Russia represents 10% of American hydrocarbons, although it is provided with shale oil, but the United States does not particularly need it and will not be directly affected by this import ban. Indirectly, the increase in world prices for crude oil, caused by tension in the physical markets, has an indirect effect.

Similarly, Britain has fields in the North Sea, albeit partially exploited, and France has nuclear power. If today many oil traders are betting (through options) on $200 oil, this is good, because all reactions to the inflationary context associated with the war will have no effect for two to three months. We are indeed experiencing a third oil shock with a structural imbalance between supply and demand (which would not exist even in the event of a war if we continued to invest in exploration and development of oil fields for 2014), while the demand in the post-COVID world was – temporarily , due to the technical backlog – very strong (OPEC struggled to increase its production at the beginning of the year).

Thus, in an already tense situation, sanctions will remove for several months at least one of the largest players in the market, Russia: the world’s third largest producer, the world’s second largest exporter, producing from 10 to 11 million barrels per day, of which 6, 5 million are intended for export, and of these 6.5 million, about 3 million are for Western countries that can impose sanctions (the rest are from developing countries and China). Can we quickly replace those 3 million bpd? We may doubt it. If we were to bring Iran back into the game (which is unlikely to happen very quickly, given the complexity of the issue and the relative Russian-Iranian friendship), we would recover 1 million barrels. We will find some, of course, but not all, unless the mullah regime falls. Another way is Venezuela, which was also excluded from the world market after the rigged elections, but the old oil installations have to be modernized, they have not been supplying the world market for years, so it will take several months to restore maybe 0.5 million. barrels per day. OPEC, in particular Saudi Arabia, can bring reserves back to the market, and of course there is the US shale oil map, where a number of companies have been zombified since 2014 because they cannot economically extract oil at a price of $50, which will be able to back to substantial production: but you can’t “rebuild” a farm in a few weeks after years of underinvestment. There is no hope on this side for at least three months. The US State Strategic Reserve is a more serious direction in the short term.

In any case, the world economy has a 2 million barrel deficit problem (I’m sure we’ll find at least a million between OPEC, the US and a few new entrants) that will show up within months if sanctions are confirmed and widely adopted. . Or 2% of world demand (consumption). Economists have calculated that from $130 for Brent there is demand destruction: specifically, people faced with an excessively high price of fuel, for example, will refuse to travel if they can, take fewer vacations, or find a collective solution, taxis, for example, for technical unemployment. To eliminate this 2% of global demand and balance the market, it may be necessary to go over $150 and tickle that $200 bar… Because, I repeat, we don’t know how to find these 2 million barrels potentially disappearing today. from the market; surplus stocks are often lower quality hydrocarbons that can be mobilized slowly, this may be the answer after six months but not immediately. The same is true with American shale oil, where there is not enough manpower, pipes, sand: there, too, there would be a solution in ten months, and not immediately. Finally, even without a formal embargo, it should be understood that no one in the West is buying Russian oil anymore: carriers (Maersk, CMA) have stopped trading with Russia (half of Russian oil exports are by sea, not by land). pipeline), insurers no longer insure Russian goods, they no longer send equipment there… the stigma associated with the war has already isolated the Russian oil industry, some of whose tankers no longer find buyers. Even the Chinese are waiting for the development of the war and are not in a hurry.

In the absence of a quick de-escalation of military and political tensions, the price of oil will rise until the consumer despairs. Concretely, this means the destruction of this demand, the slowdown in economic activity and the effect of a recession (which also happens with metals or even housing in some countries). The enemy of expensive oil is expensive oil, as they say: oil destroys itself. I encountered this phenomenon in 2008 while working in an investment fund. Then there is a sharp downward price reversal, as in late 2008 or spring 2020.

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