(Tokyo) The price of Brent was on Tuesday at its highest level in more than seven years, boosted by supply disruptions, strong geopolitical tensions and a rise in demand, despite the Omicron variant.
Updated yesterday at 9:34 p.m.
The barrel of Brent from the North Sea was trading for 87.26 dollars around 4:50 GMT (+0.9%), after having climbed to 87.55 dollars earlier in the session.
It thus blithely exceeded its October 2014 level ($86.74) in the morning in Asia, a day after catching up with its October 2018 level.
The American barrel of WTI gained 1.25% to 84.87 dollars at 4:50 a.m. GMT, approaching its peak last October (85.41 dollars) which was a high since 2014.
Several factors are contributing to this new oil surge, including production disruptions “in Libya, Nigeria, Angola, Ecuador and, more recently, in Canada due to extreme cold,” according to Exinity analyst Hussein Sayed.
“Markets remain focused on the delicate balance between supply and demand, which seems to have a fairly large impact on price fluctuations throughout the post-pandemic economic recovery,” notes Walid Koudmani, analyst at XTB.
Geopolitical tensions
Geopolitical risks are added to the equation, and this in several areas of the globe at the same time, from the Gulf to Ukraine.
Yemeni Houthi rebels attacked civilian facilities in the United Arab Emirates on Monday, killing three people.
A Saudi-led military coalition retaliated with airstrikes on Sanaa, the Houthi-held capital of Yemen. Washington has also promised to “hold accountable” the Yemeni rebels, who are supported by Iran.
These events “have further stimulated the prices” of oil, noted ING analyst Warren Patterson.
All eyes are also on the lingering threat of a Russian invasion of Ukraine. With further disruptions to Russia’s gas supply to Europe, energy prices, and therefore crude, could rise further, some analysts say.
Natural gas prices, which are still very high, are contributing to the rise in oil prices. The result is “an increase in the demand for diesel and fuel oil to replace natural gas, wherever possible”, underlines Bjarne Schieldrop, analyst at SEB.
As for the Omicron variant of COVID-19, initially perceived as a threat to crude purchases, it is proving to be less serious for demand than its predecessors.
OPEC in a strong position
“Only OPEC members and their allies can drive prices down at this point by pumping more crude,” says Sayed.
“Instead, OPEC countries are likely to stick to their strategy of gradually easing production cuts as they take advantage of the current high prices,” he continued.
The Organization of the Petroleum Exporting Countries (OPEC) and its partners (OPEC+), including Russia, are indeed announcing month after month marginal increases in their extraction targets, and are struggling to achieve them, which should not make it possible to meet needs to.
Saudi Arabia had asserted earlier this year that compliance with the agreement and the caps was essential. In other words, members with spare capacity cannot and should not step in to compensate for the lack of production of members who are unable to meet their caps.
“OPEC’s output gaps are set to widen, with Russia being the next big deficit driver,” predicts Joel Hancock for Natixis. According to him, the growth of the oil supply outside OPEC + and outside the United States being “relatively weak”, it will be necessary “to call on American shale oil to meet the expected growth in consumption”.
During the pandemic, the plunge in crude prices had pushed into the insolvency of shale oil drilling companies, the cost of production of which is much higher than the light oil drilled, for example, in Saudi Arabia.
Many analysts now expect crude prices to rise above $90 a barrel, or even the $100 mark, which still seemed impossible to envisage a few months ago.
Goldman Sachs analysts, for example, see Brent reaching $96 this year, then $105 in 2023, according to a note published Monday.