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As we reported today, oil prices remain near their yearly high and Global Research raised its Brent crude price forecasts for this year and next, saying that tighter oil supply and recovering demand could push oil briefly to $100 per barrel in 2022.
Thus, Wall Street’s betting on crude oil’s future.
With billions being invested in renewable energy, their thinking goes, new investment in oil exploration and development is being neglected. Oil still will dominate energy markets for years to come; therefore, at some point, supplies will run short and prices will jump.
In fact, as we also reported, natural gas futures are up nearly 100 percent not only because of expectations for higher demand, but also because U.S. producers cut back on drilling plans during the height of the COVID War when demand was down and prices were falling.
Oil prices and consumption crumbled during the pandemic; oil majors posted record losses and thousands of small U.S. producers went bankrupt.
About $330 billion was spent on oil exploration and development last year, less than half of the industry’s record 2014 investment, consulting firm Wood Mackenzie reported.
Thus, to keep prices high, we forecast only modest investment over the next few years.
The price of West Texas Intermediate, the benchmark U.S. oil, reached $73.58 on 21 June for July delivery, about double its price a year ago and its highest in more than two years.
Some options traders are placing bets that oil prices will reach triple digits by the end of 2022, the WSJ reported.
At the same time, oil companies’ financial backers are urging them to curtail exploration and focus on pumping more oil to generate cash, a strategy that could lead to shrinking supplies in future years, as we reported in our 25 May, 2021, market overview and in this Trends Journal.
As a result, the number of oil rigs looking for new oil in the U.S. is less than half as many as at the end of 2018, according to oil services firm Baker Hughes, even though prices have been climbing since last November.
Prices will soar in the next few years because, for the first time, consumption will outpace the industry’s ability to produce, Leigh Goehring, managing partner at investment firm Goehring & Rozencwajg, which focuses on commodities, told the WSJ.
“This is the basis for the next oil crisis,” he said. “We’re in uncharted territory.”
There are enough proven reserves in the ground to last for several decades at pre-2020 consumption rates, according to oil industry data.
However, a majority of investors are betting on renewable energy as Fiat, Volkswagen, General Motors, and other automakers set “death dates” for their production of gas buggies and a global divestment movement had siphoned an estimated $14 trillion from fossil-fuel investments by the end of 2020, according to S&P Global Market Intelligence.
Also, Shell, BP and other oil companies have promised to slash noxious emissions to meet the Paris Climate Accords’ goals.
In late May, Chevron’s shareholders passed a resolution calling on the company to limit emissions from the products its customers burn (“Shareholders, Court Darken Oil Industry’s Future,” Trends Journal, 1 June, 2021).
In contrast, some analysts point out that major suppliers, such as Saudi Arabia and Russia, are producing less than they could and that when shortages loom and prices rise, countries and companies with large reserves will open taps to meet demand, heading off price spikes that could tank the global economy, the WSJ reported.
TREND FORECAST: The key question facing the oil industry is whether renewable power sources and electric vehicles will capture enough market share to thwart the prospect of a worldwide oil shortage and soaring prices.
We disagree. For example, there is a lot of hype about the move toward electric vehicles, however, besides being more expensive to make than conventional cars, while they do emit less carbon while being driven and recharged, the mining of battery materials such as lithium and other rare earth minerals are, as we have detailed, environmentally unfriendly.
And overall, as prices go up, there will be more demand for cheaper energy sources. For example, as we noted in this Trends Journal, natural gas futures are up nearly 100 percent. Thus, there is higher demand for thermal coal which is cheaper.
Therefore, the bottom line will dictate the future of renewable energies.
TREND FORECAST: Iran and Israel are arch enemies, both of which elected new, hard-line leaders. Tensions in the Middle East now are more likely to escalate than to ease, adding additional upward pressure to the price of oil.
As we noted in our 21 March, 2021, issue (“Another Week, Another Record for Dow”), should military tensions break out in the Middle East, oil prices could spike, perhaps at least as high as $100. If oil reaches and sustains that price, it will be a spark that could crash equity markets and drive the global economy deeper into the “Greatest Depression.”