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Brent and WTI prices hit $88.13 and $85.74 respectively on Tuesday morning. In question, geopolitical tensions and interruptions of production.
Will the price of oil soon exceed the bar of 100 dollars a barrel? The price of Brent and WTI reached their highest level in more than seven years on Tuesday, January 18, boosted by supply disruptions, strong geopolitical tensions and a rise in demand, despite the Omicron variant.
At around 0850 GMT, a barrel of Brent North Sea oil was trading for $87.60, after climbing as high as $88.13 earlier in the session. It thus blithely exceeded its October 2014 level ($86.74) in the morning in Asia, a day after catching up with its October 2018 level.
The US barrel of WTI was trading for $85.25, after hitting $85.74 a little earlier, surpassing its peak of last October ($85.41) which was a record since 2014.
Several factors are contributing to this new oil surge, including production outages “in Libya, Nigeria, Angola, Ecuador and most recently in Canada due to extreme cold weather,” according to Exinity analyst Hussein Sayed.
“Markets remain focused on the delicate balance between supply and demand, which seems to have a rather large impact on price fluctuations throughout the post-pandemic economic recovery,” notes Walid Koudmani, analyst at XTB.
A crisis heightened by geopolitical tensions
Geopolitical risks are added to the equation, and this in several areas of the globe at the same time, from the Gulf to Ukraine.
On Monday, Yemeni Houthi rebels attacked civilian facilities in the United Arab Emirates, killing three people. A Saudi-led military coalition retaliated with airstrikes on Sanaa, the Houthi-held capital of Yemen. Washington also promised to “hold accountable” the Yemeni rebels, who are supported by Iran. Events that “have further stimulated prices” of oil, notes ING analyst Warren Patterson.
All eyes are also on the lingering threat of a Russian invasion of Ukraine. With further disruptions to Russia’s gas supply to Europe, energy prices, and therefore crude, could rise further, some analysts say.
Natural gas prices, which are still very high, are also contributing to the rise in oil prices. The result is “an increase in demand for diesel and fuel oil to replace natural gas, wherever possible”, underlines Bjarne Schieldrop, analyst at SEB.
As for the Omicron variant of Covid-19, initially perceived as a threat to crude purchases, it is proving to be less serious for demand than its predecessors.
OPEC in a strong position
“Only OPEC members and their allies can lower prices at this stage by pumping more crude,” said Hussein Sayed. “Instead, OPEC+ countries are likely to stick to their strategy of gradually easing production cuts as they take advantage of the current high prices,” he continues.
The Organization of the Petroleum Exporting Countries (OPEC) and its partners (OPEC+), including Russia, are indeed announcing month after month marginal increases in their extraction targets, and are struggling to achieve them, which should not allow to meet the needs.
Saudi Arabia said earlier this year that compliance with the agreement and the caps was essential. In other words, members with spare capacity cannot and should not step in to compensate for the lack of production of members who are unable to meet their caps.
“OPEC+ output gaps are set to widen, with Russia the next big deficit driver,” predicts Joel Hancock for Natixis. According to him, the growth in oil supply outside OPEC+ and outside the United States being “relatively weak”, it will be necessary “to call on American shale oil to meet the expected growth in consumption”.
During the pandemic, the plunge in crude prices had pushed into the insolvency of shale oil drilling companies, the cost of production of which is much higher than the light oil drilled, for example, in Saudi Arabia.
Many analysts now expect crude prices to rise above $90 a barrel, or even the $100 mark, which still seemed impossible to envisage a few months ago. Goldman Sachs analysts, for example, see Brent reaching $96 this year, then $105 in 2023, according to a note published Monday.