Oil could climb as high as $150 a barrel, veteran analyst warns

Some pump jacks work while others sit idle at the Belridge oilfield on November 03, 2021 near McKittrick, California.

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Oil prices are soaring and nothing seems to be stopping their ascent. From December to January, international benchmark Brent crude climbed around $11 a barrel, and it has risen by roughly the same amount since early February, underpinned by supply issues, rising oil inflation and geopolitical tensions.

Brent going above $100 a barrel is almost a given at this point, energy analysts say; but now a growing number of forecasters are predicting that the commodity will top $125 a barrel and beyond.

Because you have this underinvestment in exploration capital, we’re running out of physical oil, we’re running out of supply,” John Driscoll, head of JTD Energy Services, told CNBC on Monday. “There’s a scenario where we could jump past $120 or even up to $150 a barrel.

Brent crude crossed $95 a barrel last week, its highest level since the summer of 2014 and a 63% year-over-year increase. It traded at $93.98 a barrel on Wednesday at 10:20 a.m. in London.

Tensions over the threat of a Russian invasion of Ukraine also helped push prices higher, although a partial withdrawal of Russian troops from Ukraine’s border areas on Tuesday led the price of the commodity to decline by 3% compared to the previous day. While Moscow has dismissed the possibility of an imminent invasion, NATO leaders and US President Joe Biden insist the risk of war remains high.

But it’s “not just the geopolitical tailwinds we’re picking up on, but the fundamentals,” Driscoll said.

“The market is in what we call a deep pullback which puts a premium on any rapidly available physical oil. We are starting to feel that demand is about to pick up, and we are looking at supply shortages,” a- he explained.

These shortcomings exist both in terms of production from OPEC+ – the alliance of OPEC and several non-OPEC countries – pumping oil below the levels it promised to add to the markets, and the sector’s underinvestment in the United States and other countries as a result of Covid-19 and government pressures to switch to renewables.

OPEC+ members with quotas fell short of their production targets of 700,000 barrels a day in January, with co-leaders Saudi Arabia and Russia also pumping below their quotas, according to S&P Global Platts. This comes despite a commitment to gradually unwind record supply cuts.

Investors ‘crowd into oil markets’

These are not the only signs of a continued bull run for oil: money is flowing into investments in oil-related stocks, and international oil companies are reaping huge profits. As US inflation hits its highest rate in decades, analysts recommend energy stocks as smart investments. This inflation, aided by global supply chain issues, is not only affecting prices at the gas pump, but also driving up costs for oil drillers themselves, especially in the shale play. in the USA. Oil service companies said they would pass on their increased costs to producers.

“As we increase consumption, our spare capacity decreases, but you also see other key indicators like fund managers, non-trading, repos, piling up in oil markets,” Driscoll said. “Stellar results from oil stocks (like) BP, Shell, Total hitting recent highs.”

Indeed, the S&P 500 index for the energy sector is up more than 50% year over year.

Driscoll isn’t alone in his bullish call – JP Morgan this month forecast oil “likely to top $125 a barrel” on widening spare capacity risk premium.

“Supply shortages are increasing. Market recognition of tight capacity is also increasing,” JP Morgan wrote in its Feb. 11 report.

The Energy Information Administration lowered its OPEC capacity estimates by 300,000 barrels per day in February, and the producer group has shown no indication that it will deviate from its planned quota increases of 400,000 barrels per day in 2022, despite calls from the United States and others to help bring down oil prices.

“This underperformance comes at a critical time – and in our view, as other global producers falter, the combination of underinvestment within OPEC+ countries and rising demand for oil post-pandemic ( as pointed out by Kolanovic et. al. here) will contribute to a potential energy crisis point,” JP Morgan analysts said.

Until the request is destroyed

These factors, along with the continued global recovery from the coronavirus-induced economic crash, mean there are very few obstacles to further rising prices – which could trigger an economic recession, warned energy ministers at the Egyps Petroleum conference in Cairo this week. RBC Capital Markets analysts believe the only thing that could reverse the price rise is a collapse in demand as the price of the commodity rises above what buyers can afford.

“We could be ahead, but the main cornerstone of our thesis over the next year or more, assuming the macro economy holds up, is that the oil cycle will rise until it finds a level of demand destruction,” said Michael Tran, commodity and digital intelligence strategist at RBC Capital Markets in an analyst note on Monday. “It just doesn’t get any more bullish than that.”

The bank sees oil hitting $115 a barrel or higher this summer.

“Historically, markets driven higher by tight commodity and crude inventories are difficult to resolve absent a demand destruction event or a supply surge, which don’t seem like looming on the horizon,” Tran wrote.

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