As Oil Prices Soar, Energy Paradigm Shifts, 3 Market Signals to Watch
Russia’s incursion into Ukraine, along with triple-digit oil prices for both and the invasion it helped spark, changed the energy landscape in just two weeks.
Given the ever-changing paradigm for the commodity itself – both from a price and production perspective – and the global economy that depends on it, there are three important considerations to keep in mind in order to to stay abreast of how market participants may react and what the possible consequences could be.
1. Will OPEC+ fend off pressure to cut ties with Russia?
OPEC’s partnership with Russia and other countries has proven quite effective. Indeed, it lasted longer than some experts had expected.
These producing countries seem to work well together, for the most part. Yet, in this political and social climate, everyone, from publishing companies to governments for energy companies for international sports federations cut ties with Russia.
The question is whether OPEC will feel compelled to distance herself from Russia. OPEC is unlikely to bow to outside global pressure, as OPEC typically does not let politics or sentiment get in the way of its goals. Today, Russia is consistently one of the world’s top three oil producers. It is the essential component of OPEC+. Saudi Arabia and Russia together are the strongest supply force in the market today.
If OPEC felt compelled to part ways with Russia, OPEC’s influence in the market would be severely diminished. Additionally, the cartel may never entice Russia to join if it cuts ties today.
2. Will high oil prices encourage more domestic production in the United States?
ExxonMobil (NYSE:) and Chevron (NYSE:) indicated this week that they do not plan to significantly increase oil production over the next five years. These announcements come in even though the prices are in the triple digits. They may change their plans, but that’s what they’re telling investors today.
These corporate announcements, which seem counter-intuitive to the rise in the price of oil, nevertheless serve to keep the stock price high and drive it higher. For example, Barron’s underline on March 2 that after ExxonMobil’s announcement, “the stock is up.”
However, if oil prices remain high, the incentive for more revenue may be too hard to ignore, especially for small producers. They have been prevented from increasing production due to uncertainty surrounding federal government regulations and permits and due to a lack of funding. Soaring oil prices will surely convince some producers that it is worth dealing with changing government policies.
Additionally, high oil prices will be too tempting for financiers to ignore. Some investors and lenders will step in, providing additional capital which they will make available to the industry. What we cannot predict is how much additional production will come online and how quickly that production might materialize.
3. Will more interest in alternative energy and the “peak demand” discussion return?
Oil prices rose for much of the first decade and a half of this century. This price increase has been accompanied by a resurgence of investment in alternative energies and electric vehicles. It also led to discussions and predictions of an idea called “peak demand.”
However, over the past seven years, oil prices have been significantly lower and consumers have had less incentive to worry about gas prices or utility prices.
Now that oil and prices are high again, we could very well see a return of consumer interest in alternative energy. High oil and gas prices are being used as strong selling points to convince consumers to buy electric vehicles and install solar panels on their homes. Governments around the world, particularly in North America and Europe, are already regulating and legislating behaviors to support alternative energy industries. But triple-digit oil prices will further incentivize consumers to pursue these options to reduce their energy costs.
Before the COVID pandemic, global oil demand exceeded 100 million bpd. Although it is still recovering, it is currently around 100 million bpd. It is not yet clear how high oil prices need to rise – and stay at these levels – to reduce demand.
Some analysts believe that oil prices will have to to reach the $150 or $170 a barrel mark in order to see demand destruction. However, if prices remain high, expect further talk of peak demand which, in turn, tends to be a downward force on prices.