Oil prices remain at their highest amid growing supply fears
The psychological barrier of $100 for a barrel of oil, which until recently was viewed as remote, is now a stone’s throw away. On Friday, the price of Brent traded above $93 a barrel, an increase of more than 18 percent since the beginning of 2022.
In the US, the price of WTI has followed a similar path and traded above $92 a barrel. It adds seven consecutive weeks to the upside. And it has its own tailwinds: A winter storm in Texas, an oil state par excellence, has raised fears of supply disruptions in the largest American shale play which produces almost 5 million barrels per day. Prices were also supported by the weakening of the US dollar, in particular against the euro.
As a result, oil prices moved to more than seven-year highs — and there are no clear reasons on the horizon for them to drop — supported by solid demand as the omicron variant is not slowing down activity as much as initially feared and supply tensions stemming from geopolitical risks, as well as the onset of cold weather in the US.
Add to this the inability of OPEC+ to achieve the announced increase in production, given the obvious lack of spare capacity among some member countries. However, the geopolitical and weather factors are temporary in nature and can have only a short-term impact.
Oil prices also received support from US Energy Information Administration data released on Wednesday. The data showed that US crude inventories over the past week fell by 1 million barrels, to 415.1 million barrels, contradicting analysts’ forecasts of an increase of 1.5 million barrels.
At the same time, distillate inventories, which include diesel and fuel oil, fell by 2.4 million barrels, at a time when the US is experiencing an intense cold snap across the country, a situation that has boosted demand for fuel.
An additional factor supporting oil prices was US oil production, which fell for the second week in a row and reached 11.5 million bpd against 11.8 million bpd at the beginning of the year. This data shows that, despite the growth of drilling activity (for the week ending Feb. 4 operating oil rigs increased by two to 497 units), US production continues to stagnate.
In addition, the market continues to monitor the ongoing tensions around the Ukraine crisis. Tensions between the countries remain, and the escalation of the conflict could lead to supply disruptions. If gas supply to Europe is disrupted, it could lead to an increase in gas replacement with oil.
And, if the West imposes more commodity-related sanctions, oil production could also suffer. However, diplomatic priority in resolving the issue has reduced risks — at least for now — and limited price increases.
Moreover, oil-producing countries show no signs of being uncomfortable with high prices. At its meeting last week, OPEC+ did not move and decided to keep intact its previous decision, which foresees a gradual increase in supply by 400,000 bpd by March. The meeting took place in record time. Saudi Energy Minister Prince Abdulaziz bin Salman said it took just 16 minutes to discuss.
However, the problem is that actual OPEC+ production lags far behind target levels. At the end of 2021, OPEC+ production was more than 800,000 bpd below target and now it could increase to about 1 million bpd. It is more difficult to restore production than to reduce it. New projects are also not enough, since the previous five-year plan was characterized by a very low level of investments in upstream, including due to the growing environmental agenda in OECD countries.
In such circumstances, OPEC+ countries had no other option but to stick to the previous schedule. Increasing quotas by more than 400,000 bpd to contain the rise in oil prices makes no sense, since only four members within the group — Saudi Arabia, Iraq, the UAE and Kuwait — are able to increase production and maintain it. However, Iraq has recently flagged up difficulties in ramping up production tangibly above current levels.
Thus, in the short term, the oil market will continue to be under pressure, as the dynamics of the current trend will not likely change soon. High inflation provides additional support for oil price growth. Despite the strengthening of the hawkish rhetoric of the US Federal Reserve during its January meeting, high energy prices will keep inflation at a high level at least in the first half of 2022.
Therefore, the growth of oil prices in the short term is likely to continue. However, the seasonal decline in demand, usually observed in the first quarter, may limit the potential for prices to rise.
For now, supply shortfalls remain a key supporting factor for prices. The media also focus on geopolitical tensions, but this factor has rather a psychological effect and may not have a significant impact on oil prices in the future. But, if the current sentiment is maintained on the horizon for the next months, the achievement of $100 per barrel looks quite real.
Indeed, there is a growing feeling in the market that high prices will not disappear overnight. Germany’s Commerzbank has raised its oil price forecast for the first quarter to $90 a barrel, up from $80 in its previous forecast.
• Dr. Namat Al-Soof is an Iraqi oil expert with experience in upstream and market analysis. He has held senior analyst positions at OPEC, IEF in Riyadh, and the OPEC Fund for International Development, and is currently a consultant to a number of companies in the oil industry.