Company / Analytics

Analytics, 20 January 2022

Oil prices could hit $100 as supplies remain tight

Oil prices are rising with investors betting that global supply will remain tight, and analysts predict price could hit $100 this year.

Supply outages, coupled with frantic buy and signs the Omicron coronavirus variant will not be as disruptive to fuel demand as previously feared, has pushed some crude grades to multi-year highs, suggesting the rally in Brent futures could be sustained for a while longer.

Producer group OPEC+ is not providing enough supply to meet strong global demand, and together with OPEC have gradually relaxed output cuts implemented when demand collapsed in 2020. Meanwhile, smaller producers cannot increase supply and others have been wary of pumping too much oil in case of renewed COVID-19 setbacks.

On Tuesday, Crude-oil prices settled at their highest level since 2014, with geopolitical tensions in focus after an attack on an Abu Dhabi oil facility. Meanwhile, analysts at Goldman Sachs warned that “surprisingly large” supply deficits could see Brent prices top $100 a barrel next year.

Oil Prices supplies will remain tight

What course will oil take in 2022? This is the question in the minds of all who use or trade the commodity. In investment cycles, the bulls and the bears are predicting two extremely divergent paths for what all agree is going to be a tumultuous year for Big Oil. One vision predicts that supply will recover as production returns to business as usual, and oil demand steadies or decreases. In this scenario, we can look forward to stabilizing oil prices. The other vision is that demand growth will keep on keeping on as stockpiles remain low. On Tuesday, the US Energy Information Administration (EIA) increased its oil price outlook by a considerable $5 per barrel. However, true to the tumultuous shape the year is already taking, the EIA “sees those levels falling throughout the year as global supply outpaces demand as soon as the second quarter” according to reporting from energy information and analytics company S&P Global Platts. For the long term, the EIA is expecting oil demand to keep growing, even as the global push for decarbonization continues to gain traction amidst increasingly urgent calls from global leaders and environmentalists. The EIA expects global oil demand to increase 3.62 million (barrels a day) year on year in 2022, up 70,000 (barrels a day) from last month’s Short-Term Energy Outlook.” If this projection comes to pass, global oil demand would finally top 2019 levels for the first time since the pandemic began in the early months of 2020, topping those numbers by approximately 260,000 barrels a day.

Meanwhile, OPEC’s expectations for the 2022 oil market is even more optimistic (from an oil cartel’s point of view, not so much the aforementioned environmentalists). OPEC sees global oil demand topping pre-pandemic highs to the tune of 101 million barrels a day, and even surpassing 103 million barrels a day in December of this year. Projections and predictions, however, are purely hypothetical at the end of the day – and the volatility of global economics and geopolitics can and undoubtedly will throw a wrench or 20 into the works.

Prices could hit $100

Following attacks on an oil facility in Abu Dhabi on Tuesday, crude prices rose to their highest since 2014. US WTI was trading at $85.43 a barrel on the New York Mercantile Exchange, following a 6.2% gain last week, its fourth weekly rise in a row. Meanwhile, March Brent crude added $1.03, or 1.2%, to end at $87.51 a barrel on ICE Futures Europe, after last week’s 5.3% weekly advance.

Goldman Sachs rolled out higher oil price forecasts, setting a 2023 Brent spot target of $105 a barrel in 2023, with 2022 headed for $96 a barrel. Analysts at the bank noted that “robust fundamentals have reversed last year’s oil price meltdown, with the market remaining in a surprisingly large deficit as the Omicron demand hit is so far smaller (and likely briefer) than that of Delta exc. China.”

The investment bank raised its Brent oil price forecasts for 2022 and 2023 to $96, $105 per barrel from $81, $85 per barrel, respectively. “Importantly, we are not forecasting Brent trading above $100 per barrel on an argument of running out of oil as the shale resources is still large and elastic,” Goldman added.

By summer, OECD oil inventories will be at their lowest since 2000, along with a historic drop in spare capacity from oil cartel OPEC and its partners. “At $85/bbl, the market would remain at such critical levels, with insufficient buffers relative to demand and supply volatilities, through 2023,” he said.

In its monthly report, the Organization of the Petroleum Exporting Countries, in its monthly report, left its forecast for 2022 growth in oil demand unchanged at 4.2 million barrels a day, estimating total global consumption at 100.8 million barrels a day.

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