Oil rose sharply in early 2022, surpassing a seven-year high this week as traders rushed to block supply due to expectations of resurgent demand, uneven production and an unstable geopolitical landscape.
Brent, the international benchmark for crude oil, traded above $ 87 a barrel on Tuesday for the first time since 2014, rising to $ 89.50 on Thursday before cutting some of its profits.
“People are just on high alert,” said Amrita Sen of consulting firm Energy Aspects. “Anything that can remotely affect downward supply or upward demand, the market responds.”
The initial rise came after Yemeni rebels claimed responsibility for a drone attack in the United Arab Emirates. The incident had no effect on oil production, but seemed to frighten traders.
Prices have risen again after an explosion in Turkey briefly halted exports via a pipeline from the Kurdish region of Iraq. The febrile atmosphere is fueled by the possibility of the United States imposing sanctions on Russia in the event of an invasion of Ukraine.
Supported by these changes, Brent futures have already added about 12% in January, after rising by 50% last year as fears fall from the Omicron coronavirus variant, which has significantly slowed the global economic recovery.
Now some analysts predict that oil could exceed the $ 100 mark this year. Such a scenario would add new fuel to the already rapid global inflation.
US bank Goldman Sachs said this week that it expects Brent to reach $ 100 a barrel in the third quarter and an average of $ 96 a barrel in 2022, rising to $ 105 in 2023. Energy Aspects forecasts average prices of $ 85 a barrel in 2022, but $ 112 in 2023.
The jump in oil prices is supported by the opinion of some industry analysts that supply will shrink as the global economy continues to recover, leaving limited spare capacity to cover any future shortages.
The OPEC producer group, led by Saudi Arabia and its allies, including Russia, is committed to replacing the production it reduced at the start of the pandemic with a combined 400,000 barrels per day each month in 2022.
But since the agreement was reached in July, few countries other than Saudi Arabia and the UAE have been able to consistently contribute to monthly growth.
In December, OPEC + increased production by just 250,000 barrels a day, according to the International Energy Agency, after Nigeria, Angola and Malaysia were underproduced. Russia has also pumped less than its quota for the first time since the 2020 cuts.
The deficit in December means the group is producing 790,000 bpd less than it planned at this stage, according to its latest monthly oil report released this week.
The United States and other major oil consumers have repeatedly called on the OPEC + group to increase supplies more quickly. But even if they agree to remove the monthly target, technical and operational problems in several countries mean the group is likely to continue to fail.
“In fact, Opec + does not have the spare capacity they claim to have on paper,” the senator said.
As global demand is expected to return to pre-pandemic levels of approximately 100 million bpd in 2022, there are questions about the availability of spare capacity to cover any operational or geopolitical disruptions up to current supply levels.
Historically, economists and politicians have argued in favor of maintaining spare capacity – often defined as additional production that can be introduced online in 30 days and maintained for 90 days – by approximately 5% of global oil supplies, for to avoid price volatility.
Current estimates of the amount of additional production available vary. The IEA predicts that spare capacity could shrink from about 5 million barrels per day to less than 3 million barrels per day by the second half of the year, with most of that capacity being stored in Saudi Arabia and the UAE.
Goldman Sachs predicts that it will fall further, predicting that the free capacity of Opec + will reach “historically low levels this summer” of about 1.2 mb / day.
Free capacity is of particular concern, as global oil inventories have fallen well below pre-pandemic levels after the United States, Europe and Japan made major withdrawals. In OECD countries, stock levels are at their lowest level since 2000, according to Goldman Sachs.
“It is quite rational to assume that there may be a break of 1 million barrels per day,” said Damien Curvalin, head of energy research at the American Investment Bank. That’s at least half of your free capacity, so you’ll really have zero buffer.
Some analysts are less worried. “These are perceptions of capacity constraints [but] in fact, we don’t think there are capacity constraints, “said Paul Horsnell, a goods strategist at Standard Chartered, adding that he believes there is enough spare capacity in Saudi Arabia, Iraq and the UAE to cover most of this year’s scenarios.
Standard Chartered forecasts a contraction in supply driven by growing demand and insufficient output growth – especially outside OPEC – but not before 2024. It forecasts average prices for Brent of $ 75 a barrel in 2022 and $ 77 in 2023.
Sen from Energy Aspects also expects a cut in supplies in 2024, but believes it has begun. “We have been talking for some time about cutting supplies from 2022 to 2025,” she said. “This is a function of the lack of spare capacity and the lack of investment, which was exacerbated by Covid because demand recovered faster in some respects.”
During previous commodity cycles, today’s high prices would lead to investments that would boost supply and rebalance the market. But pressure to reduce dependence on oil and gas limits those costs, especially in the publicly listed supermajors.
“Even at these prices, which give such a high return, [companies] effectively prioritize [environmental, social and governance]Said the senator. “If investment does not increase now, it will never happen.”