Experts predict oil prices to start escalating and may reach sustainable levels to attract attention of oil companies to continue exploration.
Brent crude, which serves as the benchmark for oil prices, spiked to a 10-month high recently of almost $94 a barrel, up from $72 a barrel at its lowest point last year.
It is on track for its biggest quarterly increase since Russia’s invasion of Ukraine.
China is cutting back purchases of expensive crude and exporting more high-value refined energy products as the country continues to invest in renewables. Yet next year, the lagging impact of high rates will subdue demand as new production arrives, hopefully calming prices. The oil market remains a complex interplay of supply, demand and geopolitical factors so as such, Malta should brace for a turbulent journey ahead. According to The Economist, crude oil prices, which remained above $125 a barrel for most of last year, have slumped to below $85 this year. However, recently they have been hovering around $92 and are on the rise.
Efforts by Opec to calm waters failed when recently, Saudi Arabia decided on an extra output cut of 1 million barrels a day – equivalent to 1% of global demand – and said it would extend the cut further. Since then, Russia has extended cuts to the end of the year, a course it is likely to continue. Jorge León of Rystad Energy, a consultancy, estimates that such demand destruction would only happen at $110-115 a barrel.
This will fuel more inflation pressures and for us in Malta, it means that the government subsidy of €20m on fuels will need to be raised. Our 100% reliance on LNG bought from Socar (an Azerbaijan supplier) to generate domestic electricity makes us more vulnerable for price hikes. Pressure from high oil prices is reaching “core” inflation, which excludes food and energy costs, as firms in other sectors, starting with transport, may raise prices to compensate.
Obviously, the much-needed equilibrium can only be reached if substantial investment in upstream activity results in new supply. The oil price narrative is a tapestry of multiple intertwined factors. Top on the list is the geopolitics of supplier regions. Any unrest or political instability in these regions can cause significant swings. Similarly, decisions by major producing countries and organisations like OPEC regarding production levels directly impact supply and, subsequently, pricing.
Global economic health is another major player. Economic booms drive up demand for energy, pushing value upwards, while recessions dampen demand, leading to cuts in cost. Furthermore, technological advancements in extraction and production, like fracking, also affect supply levels and prices.
Additionally, the global drive towards renewable energy and subsequent policies and regulations can influence the demand. The pace at which renewable energy substitutes fossil fuels in various sectors will significantly affect pricing in the long run.
According to analysts from JPMorgan, the behemoth investment bank, it is now boasting assets in excess of $2.5 trillion, as it predicts Brent crude is heading back to $100 a barrel this year if countermeasures to balance Russia’s production cut don’t happen.
In a recent investment note, J. P. Morgan’s head of global commodities strategy, Natasha Kaneva, wrote the following: “The shift in Russia’s strategy is surprising. At face value, and assuming no policy, supply or demand response, Russia’s actions could push Brent oil price to $90 already in April, reach mid-$90 by May and close to $100 in September. All this is keeping pressure on the US administration in the run-up to the November elections.”
Shortly after that note, investors got word that recent attacks on Russian oil refineries have resulted in a 7.4% decrease in production. Can we turn to production of alternative fuels like hydrogen and ammonia? Readers may be informed that Green hydrogen and ammonia could present refiners with a compelling opportunity to not only curtail emissions but also decrease heating expenses, while broadening their product portfolio for industrial clientele. J. P. Morgan is expecting a potentially turbulent super cycle in the market.
It is projecting an eventual stabilisation around $80 in a broader perspective; there is an acknowledged risk of value settling around $100 per barrel. Turning to the financial institutions they anticipate a supply-demand imbalance, with a 1.1 million barrel per day deficit in 2025, which is expected to widen significantly by 2030. In fact, BP is reportedly mulling green hydrogen production at its Cherry Point facility, which could help reduce emissions by around 460,000 tons of carbon dioxide equivalent per year. The next exciting subject is electric vehicles and cutting of emissions.
The Minister for the Environment, Energy and Regeneration of the Grand Harbour Miriam Dalli has promised the provision of another 1,340 charging stations – this may also be augmented should all filling stations install fast-charging facilities by the end of this year. Carcinogenic fumes, emitted from over 430,000 carbon belching Ice cars, can one day be substantially replaced by clean EV vehicles. Malta and three million visitors would then take a deep breath.