The real reason why oil prices aren’t $80

The UAE’s award last week of a slew of huge drilling contracts aimed at increasing crude oil production capacity from about 4 million barrels per day (bpd) to 5 million bpd underscores that the key market risk from an oil trader’s perspective remains. is skewed towards further supply amid an uneven rebound in demand after the peak of the global COVID-19 crisis in 2020. In the short and medium term, significant supply increases are likely to result from continued failures in the OPEC decision-making and implementation structure, and in the longer term from a possible influx of new crude from Iran into official oil markets and surges from non-OPEC crude oil producers.

This merchant-centric view is the fundamental reason that, despite the massive recent purchases of the crude oil market by some of the leading investment banks and their fund manager clients (and their frantic bids for oil during dips), with a view to hitting The much-vaunted $80 a barrel crude has failed to meaningfully threaten that level or the once stable price of $100 a barrel that reigned for years before the Saudis launched the 2014-2016 oil price war. This inability to threaten these vital price levels is also a function of the political reality that, as much as the supposedly eco-friendly US President Joe Biden would theoretically be happy to see oil prices go higher to narrow the discrepancy between retail prices, and more ‘green energy’ alternatives, in the cold light of political realities, the fact remains that he is well aware of how damaging such a price hike would be to a presidency.

As was very clearly demonstrated under the administration of former President Donald Trump – but that is true of all US presidencies in recent years – the White House chief generally does not want oil prices on the high side. The economic rationale for this is that for every US$0.01 that the national average price of gasoline in the US increases, it is estimated that more than US$1 billion per year in discretionary additional consumer spending is lost. As a general historical rule of thumb, it is estimated that every $10 a barrel change in the price of crude oil results in a $0.25 change in the price of a gallon of gasoline. Based on more recent historical precedent, a price of $90-95 a barrel of Brent oil equates to about $3 a gallon of gasoline and a price of $125-130 a barrel of Brent is about $4 a gallon of gasoline. The ‘danger zone’ for US presidents starts at about US$3.00 per gallon and at US$4.00 per gallon they are advised to pack their bags on Pennsylvania Avenue or go to war to take the public’s attention lead. The point was underlined by Bob McNally, former energy adviser to former President George W. Bush: “There are few things more terrifying to an American president than a spike in fuel. [gasoline] Prices.”

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This is the main reason why there has been an unofficial oil price cap of about $75-80 a barrel of White House Brent since the end of the 2014-2016 oil price war. On the only notable occasion when the price of Brent crude rose significantly above the $70 a barrel level for a sustained period and appeared to threaten the ceiling — in the second half of 2018, when the Saudis negotiated prices with Russia – President Trump sent the first threatening message in a speech addressed to the Saudis. The report made it clear that Saudi Arabia, in the eyes of the US, violated the 1945 foundation agreement on Bitter Lake between Roosevelt and Abdulaziz and therefore jeopardized US support for the ruling Al-Saud family as Saudi Arabia’s monarchy. . This came shortly after Trump made a similar comment in a speech to the UN General Assembly: “OPEC and OPEC countries are robbing, as usual, the rest of the world, and I don’t like it. Nobody should like it,” he said. “We defend many of these nations for nothing, and then they take advantage of us by giving us high oil prices. Not good. We want them to stop raising prices. We want them to lower prices and make a substantial contribution to military protection from now on.”

Oil’s inability to break through these key levels is also a major reason why US shale industry producers and their Wall Street financiers are not under government pressure to ramp up production at this time. If Brent crude were to rise resolutely above the $80 a barrel level for a sustained period and it looked like it was heading towards $90-100 a barrel, this status quo would likely change very quickly. At the same time, the White House would put enormous pressure on Saudi Arabia and the rest of OPEC producers to increase production and lower oil prices, as is repeatedly flagged by OilPrice.com.

Aside from the domestic political reasons why the US government is eager to accommodate a major increase in UAE crude oil production capacity in a relatively short period of time, the ambition of the Emirates also aligns perfectly with Washington’s new policy in the Middle East. East as a whole, which began with the “relationship normalization” agreements negotiated in the final days of Donald Trump’s presidency between the US, Israel and several Arab states. In the most basic terms, this policy aims to engage entrenched Arab states that aren’t too caught up in the unfettered China-Russia-Iran axis of power, while also trying to at least partially loosen Beijing’s and Moscow’s hold on Iran. (and thus Iraq). If the policy is successful – although the part of it pertaining to Iran and Iraq certainly seems to fail, although it is clearly worth a try – the US will also be able to move forward. reduce any significant dependence on Saudi Arabiaat least as long as it is under the control of Crown Prince Mohammed bin Salman. In all eventualities, however, the UAE is vital to US plans, which is why it was one of the first countries to be approached for the normalized relations program.

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Since then, the UAE has broadened and deepens relations with India – which the US sponsors as the first-class regional political and economic alternative to China – embarked on a massive economic expansion project (‘Operation 300 billion’), has established a new global trading platform for its oil (ICE Futures Abu Dhabi platform) in partnership with the US-based Intercontinental Exchange, and has begun to expand Fujairah’s oil export hub as a counterpart to the new Goreh-Jask oil export route. More broadly, the UAE has also removed previous barriers to the rapid realization of its oil ambitions by: reorganization of the Supreme Petroleum Councilum and has expanded its activities as part of a joint intelligence initiative between the UAE and Israel (and by extension the US) of the purchase of commercial and ancillary housing in Iran’s southern Khuzestan province. The area is a vital hub for Iran’s oil and gas reserves and the influx of UAE-registered companies, particularly those in Abu Dhabi and Dubai, but largely funded by Israel, provides a progressive platform for several ongoing intelligence-gathering operations. Building on this, last month saw a milestone of US$510 million deal with the Italian Saipem to expand the capacity of the Shah Sour Gas Plant, the flagship of the UAE, which will ensure that the UAE becomes self-sufficient in gas. This is intended to protect it from any external pressure that could be put on it by the major gas powers in the region, especially Iran, if it did not have this self-sufficiency.

Exactly the same theme of major contracts being given to companies from countries that support the new US policy in the Middle East, we see in the award last week of US$764 million in drilling contracts aimed at increasing crude oil output. to 5 million bpd as soon as possible on or before 2030. The UAE’s main oil company, the Abu Dhabi National Oil Company (ADNOC), has awarded the contracts through its offshore trading unit to US companies Schlumberger and Halliburton, in addition to its own ADNOC Drilling. The contracts will provide integrated rigless services on six of ADNOC Offshore’s man-made islands in the Upper Zakum and Satah Al Razboot fields, according to ADNOC. “These major awards for integrated rigless services will increase the efficiency of drilling and related services and optimize costs in our offshore operations as we ramp up our drilling operations to increase our production capacity and enable gas self-sufficiency for the UAE,” concluded ADNOC Upstream’s executive director, Yaser Almazrouei, last week.

By Simon Watkins for Oilprice.com

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