Is $100 Oil On The Horizon?
- The imbalance of supply and demand in oil markets is growing, and it could lead to higher oil prices.
- Prices have gone from strength to strength on both major benchmarks, with Brent Crude and WTI Crude both rising for a fourth consecutive day.
- Festering geopolitical tensions between Russia and Ukraine could also further boost prices and increase supply shortages,
OANDA’s senior analyst Craig Erlam has told City A.M. that oil prices could reach $100 per barrel during the first quarter, following intense rallies over recent days.
His bullish forecast follows upbeat commentary on prices published in his latest market update, where he argued tightening supplies amid rebounding demand meant high prices are here to stay.
Erlam said: “This imbalance has led to surging prices which will further pressure households and businesses already fighting high inflation What’s more, not only does the rally not appear to be losing steam, it may have even generated fresh momentum. While $90 could have triggered some profit-taking and a minor cooling of prices, this suggests they’ll see no reprieve and we could realistically see $100 oil soon.”
This follows an earlier forecast from the foreign exchange brokers last week that prices could hit the $100 milestone for the first time since 2013 within weeks.
OANDA analyst Jeffrey Halley said: “Assuming China doesn’t suffer a sharp slowdown, that Omicron actually becomes omi-gone, and with OPEC+’s ability to raise production clearly limited, I see no reason why Brent crude cannot move towards $100 in the first quarter, possibly sooner.”
Prices have gone from strength to strength on both major benchmarks, with Brent Crude and WTI Crude both rising for a fourth consecutive day.
Brent Crude has breached seven-year-highs, closing in on $89 per barrel following a further one percent bounce, while WTI Crude is trading near $87 following a 1.4 percent jump
This is a stark contrast to the heavy falls of over 10 percent on both benchmarks when the Omicron variant first emerged, with fears over its effect on demand now subsiding.
Commerzbank analysts Daniel Briesemann and Carsten Fritsch argued the markets were also benefitting from supply outages which were exacerbating concerns over tightening demand.
They picked up on a pipeline fire from Iraq to Turkey which briefly stopped flows, increasing concerns about an already tight supply outlook.
The explosion that set off the fire on the pipeline in the southeastern Turkish province of Kahramanmaras was reportedly caused by a falling power pylon, rather than an attack.
However, as the pipeline carries crude out of Iraq, the second-largest producer in the Organization of the Petroleum Exporting Countries (OPEC), to the Turkish port of Ceyhan for export, it has only worsened supply chain fears.
The analysts also pointed to the Organisation of Petroleum Exporting Countries and its allies including Russia (OPEC+) consistently missing production quotas.
Despite committing to increase supplies by 400,000 oil barrels per day, production has been hovering 35 percent below expected levels, even though demand has only increased.
OPEC still envisages a 4.15m barrel per day increase in global oil demand this year, with a daily average demand worldwide of 28.9m barrels per day.
While previous expectations were of an oversupply this quarter, this would require OPEC to boost supplies consistently around 250,000 every day this month, way below expectations but still challenging for the organsation.
Commerzbank said: “OPEC is still unable to achieve this: in December, production increased by a mere 170,000 barrels per day. The output of those OPEC countries that have signed up to the agreement is now 629,000 barrels per day below the agreed level.”
Meanwhile, festering geopolitical tensions between Russia and Ukraine could also further boost prices and increase supply shortages, with tensions straining supply chains and causing severe economic turbulence.
If Russia invades Ukraine over the coming weeks, having amassed over 100,000 troops within close proximity of its borders, this would likely boost the current price rally.
Alongside macro-factors, Goldman Sachs wrote in its report last week, Finding Value In Scarcity, that structural decline is spare capacity will boost prices further this spring.
Comparing the situation to a significant rally triggered in 2004 an exhaustion of spare capacity, the bank said: “At the time we labeled this dynamic ‘long-term shortages create near-term surpluses’ as the surge in long-dated prices created demand weakness that allowed inventories to build, creating a precautionary inventory cushion to buffer the oil market from a lack of spare capacity. We could very well see a similar dynamic playout in oil this year.”