The US has been reporting growing inventories over the last several weeks, yet the price of Crude’s not only hasn’t gone down, it has actually increased. What happened to the law of supply and demand? It would be easy to point to what’s going on in the Red Sea as a catalyst for Crude’s. That would explain higher Brent prices, but US supplies are unaffected. So, why is WTI buoyant, too?
The difference in price between WTI and Brent (the “spread”) naturally widened in December after the attacks on shipping heading to the Suez Canal started. But the difference has largely been maintained since then (in fact, it’s slightly lower now than it was in December). The thought would be that if crude was having difficulty getting through the Red Sea, then European buyers would turn to America. Yet American inventories haven’t been going down.
Inflation? Global Recession? Should We Be Worried?
Retail gasoline prices in the US have also been higher, a potential pressure to inflation if they are maintained long enough to start causing increases in transportation costs. A couple of weeks ago, a refinery was taken offline in Oklahoma after a power outage. That would contribute to some of the difference between available refined goods and inventories. Also, this is the period of time in which US refineries typically take some time off for maintenance, because February has the lowest demand, usually.
Those refiners would presumably start ramping up in March ahead of expected spring and summer demand in the US. That would put increased demand in the price equation for crude, meaning there is reason to suspect the current price trend might continue in the short term. Meanwhile, economic indicators from the US and Europe have outperformed, suggesting that maybe the worst of the economic problems are in the rearview mirror. That might mean increased demand from the world’s largest consumer.
Slowing Production Amidst Rising Demand
According to the head of the world’s largest oil company, Saudi Aramco, global oil capacity has been declining. Over the last year, around 6 million bpd were taken offline due to depletion and lack of investment on replacement. That significantly reduced spare demand capacity. Even though the Saudi government says it’s comfortable with there being 3 million bpd of available capacity (most of it under their control), that’s under 3% of total global demand.
The thought is that as the world transitions to green energy, demand for crude should go down. This makes investment in new production capacity seem like a bad financial idea, since it often takes years for exploration to result in actual new oil pumping. By then, we will all be driving EVs and surfing the internet with solar energy.
A Coming Price Crunch?
But in the short term, demand is still expected to keep rising. While we might point to Saudi Arabia’s capacity to increase production as a cushion against rising prices, the Kingdom has some very ambitious spending targets. It might not seem prudent to let a supply shortage go to waste. And Brent has approached $100/bbl just a few months ago, without Saudi Arabia increasing production.
Barring a major slowdown in the global economy, there seem to be several trends aligning to push Crude’s higher in the short term which seem to be overcoming the effect of rising inventories. Particularly given that it appears the Houthis are not undeterred from attacking vessels, and even claimed to have sunk a ship yesterday.
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