Are Triple Digit Oil Prices In Your Future?

Jeff Currie at Goldman Sachs made headlines recently predicting higher commodity prices for 2023, including “’Does anyone remember what happened to oil prices from January of ‘07 to July of ‘08?’ Currie said. ‘The Fed takes their foot off the brake, China puts the pedal to the metal, Europe starts to grow quickly’ and oil prices rose by $100 a barrel, he said.” He doesn’t seem to be predicting a $100 per barrel increase this time around, but he has suggested $110 could be the price by the third quarter.

Currie has a reputation as an oil price bull, although I haven’t analyzed his past predictions to see if it is earned. (My own predictions show a bearish bias, as many have leapt to point out.) And I don’t have access to his research beyond what has appeared in the all—too—summary news items. Still, it is worth considering the drivers that would take us to triple digits—or not.

An old economist joke (from Edgar Fiedler, according to Adam Sieminski) is ‘predict a price or a date but never both’ which is certainly apt. Almost any price will occur sometime and you can then point to having been right. Some would also say ‘predict early and often’ and hope that people only remember your good forecasts.

Of course, Currie is pointing to more than just the three factors above including low oil inventories and minimal spare capacity, and these are all important drivers of prices, but they are not as concerning as in 2008. For example, the oil market balance as seen in the January 2008 Oil Market Report from the IEA compared to the latest is in the table below:

Those numbers, at least, imply a similarity between 2008 and 2023, which should be disconcerting. On the other hand, an increase in demand for OPEC oil (plus stock change) of 1.1 mb/d while high is not outrageously so, as the figure below shows. (Ignoring the pandemic years.) So, bullish but not necessarily triple-digit bullish.

This isn’t the whole story, obviously. He correctly notes that surplus capacity available is quite low, but that has been true for most of the past two decades. In January 2008, the estimate was 2.7 mb/d, of which 1.7 was in Saudi Arabia. Now, it is estimated that there is a minimum of 1.6 mb/d of non-Saudi, OPEC surplus capacity plus perhaps another 0.6 mb/d in other OPEC+ members, although that includes an apparent 0.4 mb/d in Russia whose availability is uncertain. Still, it does seem as if the extra demand can be met by increased OPEC production given the IEA forecast, although the market would tighten.

Additionally, Currie is bullish on Chinese demand, and while I don’t have his precise estimate of their expected increase, the IEA projects 0.9 mb/d increase from that nation, which could prove too moderate. On the other hand, the IEA balance also includes a decline of 1.3 mb/d in Russian oil supply this year, which seems questionable, given their ability to date to find new customers. The IEA has previously been overly optimistic about the effectiveness of sanctions on Russian oil exports, and it seems likely that this will prove the case again. In which case, the call on OPEC would be approximately flat this year, although additional demand from China above the IEA forecast would raise that.

Then there remains the question of inventories. They have certainly declined: the figure below shows OECD inventories, but only through end-November (given data lags). The IEA estimates that global inventories surged in November, but much of that was an increase of stocks-at-sea, given shifting patterns of Russian shipments. Those inventories are not readily available and comprise nearly half the increase; the rest is in non-OECD countries, where the data is less reliable. Still, the end-November 2007 OECD inventories represented 86 days of forward consumption (IEA’s estimate) versus the current 99 days. Stocks are 200 million barrels higher than the corresponding amount before the 2008 price surge will demand has dropped by about 3 mb/d.

So, this year has the potential for a price surge to triple digits if Chinese demand proves strong and Russian oil exports decline as the IEA expects. Or they could drop if neither of those proves out. I am moderately confident that Russian exports will not drop as predicted, but Chinese demand could very well be higher than the IEA’s forecast, offsetting that. Ultimately, then, the issue will boil down to whether or not OPEC+ increases quotas if the market tightens or lets prices rise but the pressure on the market does not seem severe. Readers are encouraged to remember this—if I prove right.