Publications: Notes at the Margin

No Equilibrium Price for Crude Oil (March 21, 2022)

 

Our title this week says everything. There is no equilibrium price for oil. Yes, the analysts at investment banks issue price projections. Yes, the consulting firms publish oil price forecasts. Yes, governments release price predictions. And, yes, even this author does the same. We have included our current submission to Consensus Economics at the end of this report.

 

It is also true that investors have expectations of oil prices. Also, at the end of this report, we trace the up and downs of the BP Prudhoe Bay Royalty Trust share price, an instrument that reflects investor anticipations of future crude prices.

 

In truth, however, markets could as easily settle at $80 per barrel today as $200. The lower price would occur if the International Energy Agency and consuming-nation governments had intelligence and courage. (They have neither.) The higher price could happen if the Robinhood gamblers take control of oil markets while physical market participants get pushed aside because they have no cash.

 

The oil market has become a casino. Roll snake eyes, and one gets extremely high or low prices.

 

This conclusion does not apply to price spreads. Today, the International Maritime Organization effect predicted for 2020 is manifesting. Low-sulfur gasoil and diesel supplies are tight and getting tighter. The prices of those products are rising compared to gasoline. Prices of the low-sulfur crude oils that produce the products are increasing compared to those of high-sulfur crudes. The differentials are real and will expand further. The forecasts we offered in this report in 2019 regarding the IMO rules are coming true, although few are noticing.

 

Truckers around the world will notice, however, especially if the casino bettors push crude prices higher. Consumers, too, will take note as truckers strike over costly diesel charges. Transport and delivery drivers can bring the global economy down. Oil producers have no such power.

 

our assertion that no equilibrium price exists for crude. We also remind readers of the IMO threat and the decreasing distillate supply.

 

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