Brent broke through the US$90 a barrel psychological mark and WTI the US$86/barrel mark last week – the highest in many months. The increase in the carbon tax from Apr. 1, combined with the bullish market trend, resulted in a spike in gas prices at nearby gas stations.
While carbon pricing is part of the Canadian federal government’s plan to reduce greenhouse gas emissions and is set to increase annually until 2030, several geopolitical and economic factors seem to be driving the global crude oil markets. The odds of US$100 a barrel crude market prices are rising.
From a geopolitical perspective, several factors are at play. Market prices surpassed the US$90 per barrel mark when the Israelis conducted a strike on the Iranian embassy in Syria on Apr. 1, resulting in the deaths of several senior Iranian officials. This event heightened concerns about escalating tensions in the oil-rich Middle East. With Tehran issuing warnings of retaliation “at a time and place of its choice” and reports suggesting that the U.S. explicitly stated it was not responsible for the airstrike, the likelihood of an escalation in the ongoing Hamas-Israel conflict increased significantly.
While the ongoing war in the region hasn’t significantly affected crude markets, it has led to Yemeni Houthi rebels targeting vessels in the Red Sea. As a result, oil and gas shipments passing through the Red Sea and Suez Canal have faced extensive disruptions and delays. Many shipping companies have opted to navigate around the African continent instead. Consequently, this has contributed to further increases in oil prices.
The recent move by Mexico to slash its crude exports is compounding the global supply squeeze, prompting refiners in the U.S., the world’s biggest oil producer, to consume more domestic barrels. Oil shipments from Mexico slid 35 percent last month to their lowest since 2019 as President Andres Manuel Lopez Obrador tries to make good on promises to wean the country off costly fuel imports. The country’s exports of the so-called sour crude – the heavy, dense kind that many refineries are designed to process – now stand to shrink even further as state-controlled oil company Pemex has cancelled some supply contracts to foreign refiners, Bloomberg News reported last week.
And with President Nicolas Maduro of Venezuela showing no sign of heeding his promises of free and fair elections in the country, the possibility of renewed U.S. sanctions on the country has gone up. That would tighten the demand-supply balance further.
Despite all this, OPEC and its allies are sticking to their production cuts. During their meeting last week, Baghdad and Kazakhstan pledged to limit their output to make up for non-compliance with prior pledges to the OPEC+. Russian Deputy Prime Minister Alexander Novak also reiterated that his country has fully complied with its commitments to reduce oil supplies as part of the OPEC+ deal.
Further exacerbating the supply constraints, the United Arab Emirates reduced shipments of Upper Zakum, a medium-sour oil, by 41 percent in March compared to the previous year’s average, according to data from maritime intelligence firm Kpler.
Disruptions to a key North Sea pipeline, unrest in Libya and a damaged pipe in Â鶹ÊÓƵ Sudan also contributed to the supply squeeze.
All this is happening at a time when demand is ramping up. With the summer driving season just around the corner, millions of Americans taking to the roads and gasoline consumption peaking in the country, U.S. refiners are gearing up to increase fuel production.
At the same time, better-than-expected manufacturing purchasing managers’ index (PMI) reports from China and the U.S. have also contributed to positive oil demand sentiment. Investors expect both these countries to see increased demand in the manufacturing and industrial sectors soon.
JPMorgan now believes that oil substantially above US$90 could lead to global demand destruction and ultimately lower prices. The crude price surge could ultimately force OPEC+ to dial back some production cuts, underlined Vikas Dwivedi of Macquarie Group.
Will OPEC+ intervene to cool down the overheated crude markets? That appears less likely at the moment. With elections on the horizon, the Biden administration must act swiftly to address the situation. What options does it have in these circumstances? It has already announced a halt in crude purchases to replenish its strategic petroleum reserves, but that may not be enough. What other measures could Biden take?
Bloomberg’s Javier Blas, on X, suggests that Washington could increase the heat on OPEC+, put additional pressure on its oil companies to increase output and even think of opening the taps of an already depleted SPR.
The oil markets are in for a tug of war.
Toronto-based Rashid Husain Syed is a highly-regarded analyst specializing in energy and politics, particularly in the Middle East. Besides his contributions to local and international newspapers, Rashid frequently lends his expertise as a speaker at global conferences. Organizations such as the Department of Energy in Washington and the International Energy Agency in Paris have sought his insights on global energy matters.
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