Oil rally drums up expectations with analysts forecasting $100 prices
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.”
His bullish perspective also backs up OANDA’s forecasts last week that prices could hit the $100 milestone for the first time since 2013 within weeks.
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 per cent bounce, while WTI Crude is trading near $87 following a 1.4 per cent jump
This is a stark contrast to the heavy falls of over 10 per cent on both benchmarks when the Omicron variant first emerged, with fears over its effect on demand now subsiding.
Prices rebound as supplies tighten and demand soars
Markets have rallied following tightening supplies, with 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 per cent 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 organisation.
Commerzbank analysts Daniel Briesemann and Carsten Fritsch questioned whether OPEC+ would be able to meaningfully increase production for the foreseeable future to cope with increased demand.
They said: “OPEC+ is still unable to achieve this: in December, production increased by a mere 170,000 barrels per day. 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 120,000 troops within close proximity of its borders, this would likely boost the current price rally.
Alongside macro-factors, Goldman Sachs wrote in a report last week that structural decline in spare capacity will boost prices further this spring.
Comparing the situation to a significant rally triggered in 2004 an exhaustion of spare capacity, it said: “At the time we labelled 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.”