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Irina Slav

Irina Slav

Irina is a writer for Oilprice.com with over a decade of experience writing on the oil and gas industry.

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How High Can Oil Really Go?

Oil price revisions started cautiously: some banks saw Brent crude averaging $65 a barrel this year, and others, of a bolder nature, predicted that the oil benchmark could climb to $65 a barrel. Just a couple of months ago, these forecasts sounded pretty optimistic for the environment, given the slow rollout of Covid-19 vaccines, the continuing excess supply of oil, and reports of coronavirus variants emerging in different parts of the world, threatening new infection waves.

Now, banks and traders are talking about Brent at $100 a barrel. Of course, a big reason for this is the slump in U.S. oil production caused by the Texas Freeze earlier this month. It was even greater than the production decline prompted by the pandemic last year, and it will take a while to recover—if it ever does fully.

Yet demand has also been recovering steadily in some key markets, most notably in China. This recovery has largely offset slow-to-return demand for oil in other large consumers such as the United States and helped push prices higher.

Then, of course, there has been government stimulus poured into economies around the world in response to the crisis. Trillions of dollars have sunk into businesses and households in hopes this will help set GDP back on the growth path sooner rather than later. Once again, the U.S. has been crucial for the change in oil sentiment: oil price forecast revisions were quick to follow President Joe Biden’s proposal of a $1.9-trillion stimulus package.

The package is still being debated, and it might end up smaller than originally proposed. But when it comes to oil, it has done its job. Banks, the Fed, and the Treasury Department all expect a swift economic recovery due to this stimulus, and a swift recovery will invariably include a rebound in oil demand as people start traveling more.

Related: Bank Of America Expects Fastest Oil Price Rise In 30 Years

Meanwhile, global oil stocks are on the decline, even if not all the reasons for that are clear. The Wall Street Journal recently wrote an analysis of the so-called missing barrels, or barrels of oil that somehow slip under the radar of inventory trackers and that last year reached a record high of 68 percent of an estimate global inventory increase totaling 1.39 billion barrels. Outside the mystery of the missing barrels, OPEC+ efforts in production cutting have been fruitful, and U.S. shale producers have this time round been cautious about returning to a growth mode, not least because of oil prices.

In this context, it is not at all surprising that earlier this week that Bank of America, Socar Trading, and Energy Aspects all said Brent could rise to $100 over the next two years. According to Socar Trading—Azerbaijan’s oil marketing company—prices are up on the rebalancing fundamentals, and by the summer, Brent could hit $80 a barrel. As supply remains tight, it could climb further to $100 a barrel, the company’s chief trading officer Hayal Ahmadzada told Bloomberg.

Energy Aspects Amrita Sen, on the other hand, cited economic stimulus as chief reason for the expected price rally.

“It’s a futures market, we always discount stuff that’s going to happen in the future, now. That’s why prices are rallying right now,” Sen said, speaking on Bloomberg Surveillance. “We’ve always called for $80 plus oil in 2022. Maybe that is $100 now given how much liquidity there is in the system. I wouldn’t rule that out,” she added. Related: Natural Gas Production Plunged 45% During The Texas Freeze

Of course, the expectations of a demand rebound have yet to materialize outside China, and then there is the question of additional barrels coming soon from Saudi Arabia, maybe Russia, and likely Iran. With U.S. production still depressed, these may not affect prices right away. But a few million barrels daily more will certainly exert some pressure.

Then there is the latest from OPEC: the cartel is set to discuss a group increase in production in addition to Saudi Arabia removing its voluntary 1-million-bpd cut from March. The increase, however, will be modest, if agreed, at 500,000 bpd. This is the same amount of production OPEC+ brought back online in January, reducing its overall cut by 7.2 million bpd, excluding Saudi Arabia’s unilateral additional cut.

This means that come April, the group could be pumping 1.5 million bpd more than it is pumping now, and this is not including the possible return of Iranian barrels to the market. This may interfere with immediate price expectations, but by next year, the effects of underinvestment in new production will become more obvious, spurring prices higher.

By Irina Slav for Oilprice.com

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Leave a comment
  • George Doolittle on February 25 2021 said:
    "it's tough to make predictions...especially about the future!" Yogi Bear-ah.
  • Mamdouh Salameh on February 26 2021 said:
    The simple answer is that oil prices can go as high as the fundamentals in the global oil market allow them.

    Since the exit of China from the lockdown in the middle of last year I have never deviated even one millimetre in my comments to oilprice.com from my projections that Brent crude will hit $45-$50 a barrel by end of 2020, rise to $60 in the first quarter of 2021, rise further to $70-$80 in the third quarter, average $65 in 2021 with global oil demand retuning to pre-pandemic level of 101 million barrels a day (mbd) by the middle of this year.

    As I projected, Brent reached $51 by the end of December and $67 by the 25th of February and is on the way to hit $70-$80 by the third quarter of this year. However, it won’t stop there. I am projecting that we will also see $100 oil in the second half of 2022 or the first quarter of 2023. due to a demand-supply deficit estimated by then at 10-15 mbd caused by a steep decline in global oil industry’s investments.

    Crude oil is now in a bull market expected to last for at least a few years and therefore its surge is unstoppable. Prices are merely reflecting a great pent-up force which both the global economy and global oil demand were unable to release whilst the COVID-19 was raging. Whatever the reason, crude oil prices have a very long way to go with even $100 oil in sight.

    Dr Mamdouh G Salameh
    International Oil Economist
    Visiting Professor of Energy Economics at ESCP Europe Business School, London

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