“Many governments, and that includes the Indian government, take an exaggerated view of the green movement. It is going to come but it is much slower than people think and while there are great ambitions in India for going green, use hydrogen cells, costs are going to be huge. This is the first time in decades that the price of oil is high, refining margins are high and price of gas is high . For the oil complex, this is among their best times and the most profitable periods in history, ” says Fereidun Fesharaki, Founder & Chairman, FGE
There has been an extraordinary spike in crude prices. Are crude prices getting too hot and these levels are unlikely to sustain?
Well there are three factors. We need to separate them from each other. One is the issue of the fundamentals of the market. The second is geopolitical tensions and the third is whether there will be a deal with Iran or not. These three are the ones which will determine the level of price. If one looks at fundamentals alone, the price should be somewhere in the range of $80-85 by itself. Why? Because already we are in February 2022 and the demand is already back to 2019 levels. So, we have already resolved the demand issue.
The only thing which remains for us to resolve is the supply issue and the supply issue is in the hands of Opec plus. Opec plus has been slowly putting volumes in the market over the past few months and they intend to do it but they are facing problems among their own members and they cannot give the capacity that they want. Every month, Opec Plus countries put out 400,000 barrels per day. The reality is something like 50-60% of that is put in the market.
So, additional volumes were not coming in because people just do not have the capacity. Saudis and Abu Dhabi have capacity, everybody else has almost peaked out. So the fundamentals are very strong. The geopolitics relating to tensions with Russia, potential tension with the conflict with Iran are probably accounting for $3-5 of the price, but are not bringing the price to these levels. What brings the prices are the more fundamentals.
Now if we do not have a deal with Iran in the next three weeks, the prices will be well ahead of $100 a barrel because the Opec capacity is not there. Opec does not have enough capacity to continue the 400,000 barrels per day and sometimes by September of 2022, they are going to be running out of capacity giving a cushion of 2 million barrels per day capacity, which the market needs for comfort. That level can be reached by September and without Iranian crude, we have a disastrous environment in front of us between now and 2025.
The US is now an exporter of crude. How does this change the equation from the previous time when crude prices were at $100 versus now?
Well the issue is not the supply, the issue is the demand. The demand is too high. The demand came back very furiously and much more than everybody expected. People were talking that by the end of ‘22, maybe by the end of ‘23, demand will come back. Some big companies like British Petroleum had forecast that 2019 was going to be the kick year and that we are never going to go above that level. All that has proven to be wrong. Demand has come back furiously and the supply is not there.
We do not have enough capacity and the investments which were taking place on the supply side has stopped as we do not invest in the oil and gas business; we want to get rid of it. So the impact is on the supply side but they have no power to impact the demand side. So if we have less and less supply, then we are going to have higher and higher prices. There are no two ways about it.
