Countries can’t control the price of oil, but they can nudge it in one direction or another. And the latest signals from some of the most important policy makers in the oil market indicate that they want prices to stay above $80, according to
Bank of America
analyst Francisco Blanch.
That is a shift from the long-term assumption about oil prices that could benefit energy companies, and their investors. Historically, policy makers have seemed intent on keeping oil above $60—a level that incentivizes producers to drill for more of it while keeping the cost of gasoline low enough that it doesn’t slow the economy down.
In addition, the U.S. is increasingly using its Strategic Petroleum Reserve to influence oil prices, and there are signs that officials also have a somewhat higher target for oil.
The Energy Department has been selling oil from the reserve for months to increase supply and lower prices. That sale is expected to end next month, raising the question of when the U.S. will eventually shift to buying more oil to refill the reserve.
A report last week from Bloomberg said that officials are considering buying back oil when prices fall below $80. That would indicate that they see $80 as a reasonable price for oil, or at least a relatively “attractive” one at which to refill storage tanks. Earlier this month, West Texas Intermediate, the benchmark grade for U.S.-traded oil, fell as low as $81. On Monday, Brent crude, the international benchmark, was trading around $91.
“Coupled with rising global inflation, what does US energy and OPEC+ policy mean for oil prices going forward?” Blanch wrote. “In our view, it means that $80 is the new $60 for Brent.”
Buying back oil for the strategic reserve when it falls below $80 would signal to producers that the government wants to keep prices high enough to incentivize more drilling. The government needs to uphold a delicate balance, keeping prices high enough that drillers don’t walk away, while making sure prices don’t get too high that they cause gasoline prices to soar again.
In response to the Bloomberg story, the Energy Department denied that there is a “trigger price.” It said that it isn’t expecting to buy oil any time soon.
Oil could rise well above $80 next year, Bank of America predicts. Blanch, who is more bullish than other analysts on oil prices, expects prices to average $100 next year, “with upside risk from Russian supply disruptions and downside risk from a macro slowdown.”
For most oil producers, any price above $60 is profitable. But if $80 becomes the new floor, investors in oil companies could see years of solid free cash flow and dividend increases ahead. Bank of America analyst Doug Leggate likes
(OVV), and Hess (HES). He also likes
(COP) as more “defensive” picks.
Write to Avi Salzman at email@example.com