The 80 dollars is the perfect price for an oil company

The price of oil is going through a moment of enormous volatility. The war in Ukraine has created a scenario of uncertainty, in which the markets have gone from buying strongly to selling in a few days, causing the reference barrel in Europe, the Brentmove in a range of more than 30 dollars, between 130 and 98, in just 8 days.

For the large integrated oil companies in the market, the increases in the barrel are beneficial, but up to a point. In the middle ground is virtue, and this type of company prefers to see the barrel trading with a certain stability, rather than having to deal with the lurches that the price has hit in recent weeks.

a tricky balance

The sanctions against Russia for the war that has started in Ukraine have created a very complicated environment for this market. If making forecasts for barrel prices was already complex, with the current scenario it seems like an impossible mission.

On the one hand, investors seemed to discount that part of the Russian oil would be out of the market due to sanctions (the International Energy Agency expects that, from April, 3 million barrels of Russian crude will disappear from the market), and there, the strong rises experienced by the barrel, which ended with the price of Brent reaching 127 dollars, the highest since 2008, on March 8.

However, there are other producers who can enter the game. Iran is the best example. The country has a production capacity of 3.83 million barrels per day, according to data published Bloomberg, and in February it pumped 2.55 million barrels. Iranian oil could return to the market when the sanctions that the United States reactivated in 2018 are lifted. Although the negotiations seemed to be on the right track, they have not yet come to fruition, and it remains to be seen whether Iranian crude, and also from other countries such as Venezuela, they will return to the market soon.

Another source of volatility that has affected crude oil prices is the fear that the slowdown in global growth will lead to a significant deterioration in oil demand. “Oil reached $140 on March 8, and has since fallen to around $100,” explains the Energy Information Agency (IEA) in its March report.

“Prices had skyrocketed after the invasion of Ukraine, for fear of a deterioration in supply. Subsequently there have been falls, due to fears for economic growth, the increase in Covid-19 cases in China and the reduction of the bullish positions by the traders of raw materials, which have come out due to extreme volatility”, explains the Agency.

The IEA itself recognizes that the levels of oil inventories in the OECD countries are not exactly buoyant, and continue to fall: “Warehouses have stocks to cover 57.2 days of consumption, 13.6 days below the levels that they held a year earlier”, they point out, and also warn that “despite the drop in demand, the markets remain tight, and we expect inventories to continue to fall throughout the year”.

Right now, the Organization of the Petroleum Exporting Countries (OPEC) and its external partners, including Russia, are not reacting with an increase in production. “Only Saudi Arabia and the United Arab Emirates have free production capacity with which they could balance the deterioration in Russian production,” the agency said.

Heaven for the sector: a barrel in 80

For integrated companies, a spike in crude oil is not the ideal scenario. These are companies that have a part of their business in the refining and sale of derivative products, so the margins do not increase with the more expensive oil in this part of their business.

Sources from Repsol, one of the largest integrated oil companies in Europe, explain that “as an integrated company, Repsol has preferred that prices work according to market rules. It is not good that the price of crude rises excessively due to the current geopolitical tension. These types of disruptions are not good, and although they can have a very concrete positive effect in the short term, excessive tension is in no way positive in the long term.”

Thus, the evolution in the markets has not been the same for all the companies in the sector. The Europeans have been more affected since the conflict broke out with TotalEnergies cutting almost 8%, and the British BP another 6%. More modest have been the falls in Repsol, which has dropped one percentage point since last February 23.

Others, however, have taken advantage of the volatility of oil and its price. While the North American oil companies are making great advances with the current political climate, such as Chevron, which rose more than 20% in the period of the conflict and almost 40% in all of 2022, the increases in the price of the shares of the Saudi Aramco and of the Norwegian Equinor have left these companies without a tour on the stock market, according to the market consensus collected by FactSet.