Oil prices saw further gains this week as tensions in the Middle East escalated, propelling WTI crude to around US$87 a barrel, while the global benchmark, Brent, approached $91, nearing its highest level since October.
This year, crude oil has witnessed a 23 per cent uptick, driven by geopolitical unrest in the Middle East and Ukraine, alongside OPEC+'s production cuts and sustained demand. The ongoing Israel-Hamas war and Houthi assaults on maritime traffic in the Red Sea has increased transportation costs. To date, the conflict has not expanded into a broader war in a region critical to global oil supply, accounting for about a third of the world's oil production.
“What you're seeing is a clear indication that the market is concerned that Iran gets further drawn into this conflict directly; as of now, the conflict is mainly taking place through its proxies, be it the Houthis or Hezbollah,” said Rebecca Babin, senior energy trader at CIBC Private Wealth.
Babin cautions that the immediate rise in oil prices "is fear of geopolitical risk. This is not something that looks like it's going to have a direct impact on supply in the near future … if we really had supply at risk due to this escalation, crude would actually be much higher."
Price forecasts upgraded
Nonetheless, market sentiment has shifted to a more bullish outlook in recent weeks. JPMorgan Chase & Co. has suggested that Brent could reach $100 a barrel this year if Russia's production cuts are not offset by other actions. Concurrently, ANZ Banking Group Ltd. has upgraded its three-month forecast to $95.
Babin believes otherwise. “I see us kind of running into a wall of supply that exists out there, and I think that really caps the upside."
"That doesn't mean we couldn't see moves like we got [this week], with knee-jerk reactions higher. But I think ultimately those are opportunities to take profits." She adds, "I think every dollar we inch above $90 In Brent, we start to feel the pressure ratchet up for OPEC to start to unwind their cuts."
On Wednesday OPEC+ resolved to continue its supply reduction strategy for the first half of the year, maintaining tight global markets. Led by Saudi Arabia the oil cartel recently recommended maintaining the current policy stance in an online review meeting. This decision ensures that the existing output reductions of approximately two million barrels per day will extend until the end of June.
This strategic decision by OPEC+ to uphold production cuts underscores the complex interplay between global supply strategies and the dynamics of the oil market, particularly in response to varying production levels across regions. As OPEC+ tightens its grip on supply to prop up prices, the U.S., in contrast, has been ramping up its production to record levels.
High crude prices prompt merger deals
The U.S.'s unprecedented crude output levels have been challenging OPEC and its allies, necessitating a shift in focus within the North American shale industry towards sustaining and enhancing production capabilities well beyond the initial drilling stages.
This has resulted in consolidation among major producers in the sector, and now a parallel consolidation trend is anticipated among service providers. The trend that may have begun this week when SLB announced it had entered into an agreement to purchase ChampionX Corp., its competitor in the oilfield services sector, for $7.8 billion, utilizing an all-stock transaction.
The SLB-ChampionX deal is just one part of the oil and gas sector’s most robust start to a year in terms of deal-making in five years, with announced mergers and acquisitions surpassing $84 billion, based on Bloomberg's compiled data.
Highlight transactions amongst producers feature Diamondback Energy Inc.'s acquisition of Permian Basin operator Endeavor Energy Resources LP in February for $26 billion, EQT Corp.'s acquisition of Equitrans Midstream Corp, and Chord Energy Corp.’s acquisition of Calgary-based Enerplus Corp.
This surge in activity follows a wave of agreements among US oil and gas companies toward the end of the previous year, including a notable $68-billion acquisition of Pioneer Natural Resources Co. by Exxon Mobil Corp. in October, signalling an aggressive search by energy companies for new drilling opportunities.
"We think you could see one more consolidating event in U.S. pressure pumping to consolidate that market a bit more," said Stephen Gengaro, managing director at Stifel Financial. "On the larger-cap side internationally, it's probably more small transactions from here. So I'm not looking for another large deal in oil services, but I do think there are smaller things which will happen."