Hi, Just in case you have not seen it yesterday, I have copied below a great comment of madamswer yesterday regarding the oil sector.
"The determinants of prices of commodities is always driven by what happens at the margin, i.e.., marginal supply vs marginal demand .
In that regard your comment about "OPEC+ doesn't like the oil price go too high for all sorts of reasons"was probably a very relevant consideration over most times over OPEC's six-decade existence, but - and I'm usually loathe to use this phrase -this time is different.
It is different for two reasons:
First, on the supply side - historically, when oil prices got out of hand, it invited capital which invested in more oil production, thereby impacting OPEC's market share and influence.
But today, especially in the OECD - but also in non-OECD countries outside of OPEC - the propensity for new capacity to come on stream is significantly reduced, almost irrespective of how high the oil price is, due to ESG influences at all levels: government, NGOs, capital providers and even incumbent oil companies.
So a supply-side response would not be a concern for OPEC today, anything remotely like it was at any point in the past.
Secondly, on the demand side - here too the world has changed.
In the past, when the oil price became inflated, it acted as a meaningful brake on global economic activity, thereby diminishing demand for oil, i.e., a sort of self-moderating mechanism.
Today, high energy prices see populist governments becoming directly involved in subsidising parts of the oil supply chain, right up to the individual household or business level - in order to insulate business and consumers from the brunt of the pain.
And the reason governments are able/happy/willing to do this is because they are no longer constrained by monetary and fiscal discipline, as they were in the past.
Modern Monetary Theory - whereby the cost of capital to government is kept low via the funkily-termed Quantitative Easing (effectively printing money with with to buy bonds, thereby depressing interest rates) - is now thede rigeurform of monetary policy which is being almost universally adopted by western governments who have licence to operated in populist manner.
Which goes a long way to explaining why in the past an oil price of say, $130/bbl or $140/bbl, would not be tolerable for long due to demand destruction, today demand at higher prices is far more resilient due to state intervention in the market through the effective subsidising of oil consumers.
These important structural characteristics of the global oil market today - i.e. limited marginal propensity to supply combined with reduced marginal propensity for demand to reduce - were not present in the past.
This time is different.
OPEC are in the process of gaining increasing control and influence over the global oil market, and we are already seeing OPEC exercising that control and influence." (source : madamswer)
