No End In Sight For Oil Price Gains, Analysts Fear

Libya shortages and high inflation are contributing to the tightness: File Image/Pixabay

Despite a broader market sell-off on Monday, oil prices eked out a small gain due to the growing conviction that even a recession would fail to alleviate supply tightness.

On Monday the North Sea's Brent, Forties and Ekofisk grades were all being bid at higher levels than Friday; West Texas Intermediate rose 26 cents to settle at $120.93 per barrel, and Brent for August settlement increased 26 cents to settle at $122.27 per barrel.

Brent's nearest futures contract was trading more than $3 above the next month, which indicates that the crudes underpinning the global benchmark are in extremely short supply.

Daniel Yergin, vice chairman at S&P Global Inc., told Bloomberg television that "The supply situation is so razor thin" and seems to be tighter than it was during other recessionary periods.

Pavel Molchanov, an analyst at Raymond James & Associates Inc., added that "Even faced with U.S. economic slowdown, fundamentals for a tight crude market remain."

And in a good news/bad news scenario (good for energy producers, bad for consumers), many traders and analysts see oil demand growing through 2023 and supply struggling to keep pace; some fear Brent will soon reach $150 per barrel and others predict it will go even higher to $175-$180 by the end of this year, driven by post-pandemic demand and Europe's sanctions against Russia.

Compounding the problem is high inflation: the Energy Information Administration in it latest monthly report cut its forecast for U.S. oil production to 11.9 million barrels per day (bpd) in 2022 compared with an earlier estimate of 12.01 million, due to soaring costs that are forcing companies to revise annual spending plans simply to meet output targets.

The EIA also lowered its 2023 forecast to 12.85 million bpd of oil production.

Currently, it didn't help jittery traders that a political crisis caused more shutdowns of ports and fields in Libya, which normally produces about 1.2 million bpd annually and is now reportedly pumping a paltry 100,000 bpd.

Mohamed Oun, oil minister for Libya, said on Monday that "Almost all the oil and gas activities in the east of Libya are being shut down" and the risk of further political turmoil remains heightened.

Also sure to cause further angst in near-future trading sessions are U.S. gasoline prices: on Monday they rose for the first time in American history to $5 nationally.

However, Patrick DeHaan, head of petroleum analysis at GasBuddy, told media that "I don't think we're far away" from the highest prices: "I don't think it would eclipse $5.50…. I would say $5.25 is the top, but again, the market is unhinged."