There’s a fracture forming in energy markets. The looming recession is set to chip away at demand as people across the globe tighten their belts and brace for a period of economic turbulence, OilPrice said.
Some analysts think oil prices are going to soar back to $100… While others see crude pricesremaining in the low $80 range. Behind these two schools of thought lie two forces as old as time itself. Supply… And demand.
Cost inflation triggered by higher drilling demand and supply chain issues has seen the price of new oil wells go up 16% year-on-year, according to Platts. At the same time, the production rates of new rigs continue to decline across all major producing plays in the U.S., with well efficiency in the Permian falling 15% year-on-year to 1,078 b/d. According to WoodMac, ultra-deepwater wells are set to suffer the most this year, with average floating rig rate costs edging higher by 26% compared to last year, almost double that of onshore cost inflation. Diesel fuel costs and prices of steel piping have seen the most marked increases, though operator’s efficiencies such as faster drilling techniques have offset almost half of the negative impact of drilling costs.
Things are still looking bearish for crude, with WTI still trading below the 80 per barrel mark, but a number of bullish catalysts could offer support. Hurricane Ian, was touted to become the next menace of oil production and refining in the U.S. Gulf of Mexico. As of Tuesday morning, two oil majors have decided to shut oil platforms in anticipation, and the hurricane is now expected to make landfall in Florida. BP and Chevron have shut their oil platforms in the Gulf of Mexico, including the 250,000 b/d Thunder Horse and the 60,000 b/d Petronius ahead of Hurricane Ian, with other facilities unlikely to be impacted by it. Hence, oil market bulls see OPEC+ as their ultimate line of defense against a meager macroeconomic background and a strengthening dollar.