The crude oil market has been running hot lately and is showing no signs of cooling, based on the latest trading insight from Bloomberg.
Traders seem to have largely brushed off any adverse effects the Omicron wave might have on demand for crude and with a good reason: demand on the physical market has remained robust.
The report cited the latest price movements for two Russian grades, Sokol and ESPO, the latter enjoying the particular favor of Chinese refiners, as well as the rising premium in Dubai crude contracts.
Besides physical demand strength, oil prices have recently benefited from other factors as well, the latest among them a spike in Middle Eastern tensions after a Houthi attack on the United Arab Emirates.
The Yemeni rebel group claimed an attack that blew up three tanker trucks and killed three people this week and warned it may not be the last one. In response, the UAE said it reserved the right to "respond to these terrorist attacks," as quoted by Reuters.
"Analyst forecasts expect demand to outstrip supply this year as the world opens up from 2 years of lockdowns and resumes a more normal trajectory for demand," CMC Markets analyst Ash Glover told Reuters.
"This is such a perilous time right now in the oil market," Helima Croft, global head of commodity strategy at RBC Capital Markets, told the Financial Times. "We are in the oil red zone for President [Joe] Biden who is absolutely preparing to ask Opec for more barrels."
Brent crude has added more than 10 percent since the start of the year to trade at close to $88 per barrel at the time of writing. West Texas Intermediate, the U.S. benchmark, has also risen steadily in recent weeks, booking a gain of 12 percent since the start of 2022.
By Irina Slav for Oilprice.com
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And that is also why Brent crude could hit $90 a barrel during the first quarter of this year.
Geopolitically, UAE’s oil infrastructure and assets like Saudi Arabia's have become another hostage of the Houthis, Iran’s allies in Yemen.
Furthermore, there are clear indications that crude oil prices are now entering a supercycle which is defined as a sustained expansion usually driven by robust growth in demand. This means that crude oil prices are projected to continue surging during 2022-2027 which could take Brent crude price hitting $110-$120 a barrel.
The global oil market is already tight and will get even tighter in coming years as a result of a surging global oil demand and lagging oil supply situation.
How high oil prices could rise depends in the final analysis on what price does OPEC+ want and also on OPEC+’s spare capacity. OPEC+ will defend an oil price of $80 a barrels or slightly higher which is the price the overwhelming members of OPEC+ with the exception of Russia need to balance their budgets.
The quintessential question is can OPEC+ add to its current spare capacity. I believe it can with help from Saudi Arabia, Russia, UAE, Kuwait and Iraq but whether this addition will be enough to stem the continued surge of oil prices is doubtful particularly with oil market entering a supercycle.
Dr Mamdouh G Salameh
International Oil Economist
Visiting Professor of Energy Economics at ESCP Europe Business School, London