0736 GMT January 29, 2022
Now, there is increasing evidence that it could hit $100 and average around $80 in the medium-term. The $100 mark sounded unlikely when a few intrepid analysts started floating it earlier this year, but oil executives and analysts are uttering that number more regularly.
“I’m a firm believer that we’re going to be an $80 to $100 scenario over the next several years, if not higher,” said Pioneer Natural Resources CEO Scott Sheffield on the company’s earnings call this week.
Sheffield had seemed less convinced about the $100 number a few months ago. But he is increasingly sure that supply won’t be able to keep up with demand.
“I do think that we’re getting in a very, very tighter market over the next several years,” he said. “Unused capacity in OPEC+ is going to be used up in the next two years. There’s no extra supply.”
With oil prices high, producers like Pioneer are suddenly pumping out substantial cash, and returning more of it to shareholders. Pioneer’s base dividend is 62 cents a quarter, but the company also has a variable dividend that it pays out based on its cash flow. The variable dividend soared to $3.02 in the latest quarter. On an annualized basis, its total dividend yield would be nearly 8%.
EOG Resources (EOG), another large U.S. producer, increased its dividend 82% in the quarter and paid out a $2 per share special dividend — a hefty quarterly payout for a company with a $94 stock price.
Both Brent crude and West Texas Intermediate crude have been trading over $80 a barrel in the last couple of weeks, although WTI slipped below $80 on Thursday as inventories of oil rose in the U.S. Brent was back up 0.9% on Friday, to $81.25 a barrel, and WTI was up 1.2%, to $79.75 a barrel. WTI has more than doubled from a year ago.
The main reason that oil is likely to stay high is that the Organization of the Petroleum Exporting Countries has again become the main decision maker on oil prices — and OPEC members are willing to hold back some production in return for consistently high prices.
The U.S. was the wild card in oil production in the past, because producers could simply drill more when prices were high. But producers are ramping up slowly, because they want to be careful with their balance sheets. Even Pioneer is planning to grow zero to 5%, despite Sheffield’s optimism.
With U.S. supplies unlikely to return to their previous highs, OPEC has free rein to decide the price of oil, absent some larger economic shock. And for now, all the nations in OPEC, as well as allies like Russia, are refusing to bring back supply more quickly despite calls for increases from the U.S. and elsewhere. The group decided on Thursday to restore just 400,000 daily barrels of production next month, in line with its previous expectations.
“The producer group presented a united front, with energy ministers from Kuwait to Kazakhstan lining up to [defend] the decision,” noted J.P. Morgan’s commodities analysts led by Natasha Kaneva.
The only tool the U.S. might use right now is to release some oil from the Strategic Petroleum Reserve, though President Biden has seemed cool to that idea. If the U.S. did release 30 million barrels, it would probably cause oil prices to dip between $2 and $5, Kaneva estimates. That is not enough to change the commodity’s trajectory.
For now, OPEC holds the cards.
“If these dynamics are maintained in 2022, OPEC+ may target a particular market outcome, whether it is an inventory premium, resulting in an average Brent oil price of $80 next year, or a spare capacity premium, that could push prices much higher to over $100/barrel,” Kaneva wrote.
This article originally appeared on barrons.com.