Oil prices rose to seven-year highs today, with both major benchmarks rallying amid tightening supplies and festering geopolitical tensions.
Brent Crude futures are hovering at around $86.94 per barrel – having reached $88 earlier in the season – following a 0.53 per cent increase.
Meanwhile WTI Crude has soared to $84.62 after a one per cent bump.
Prices were further boosted by an encouraging market outlook published by the Organisation of Petroleum Exporting Countries (OPEC).
In its freshly published monthly report, OPEC stuck to its forecast for robust growth in world oil demand this year, buoyed by reduced concerns over the spread of the Omicron variant and its potential effect on demand, while interest rate hikes are unlikely to offset the benefits from soaring inflation across developed markets .
It would also coincide with increased vehicle usage and air travel as restrictions ease across developed market and people leave their homes.
OPEC said: “Monetary actions are not expected to hinder underlying global economic growth momentum, but rather serve to recalibrate otherwise overheating economies”
The organisation has also maintained its forecast that world oil demand in 2022 will rise by 4.15m barrels per day, which is above pre-pandemic levels.
It also expects oil use will surpass 100m barrels per day in the third quarter for the first time since 2019.
OPEC added: “While the new Omicron variant may have an impact in the first half of 2022, which is dependent on any further lockdown measures and rising hospitalisation levels impacting the workforce, projections for economic growth remain robust.”
The group met earlier this month, alongside its allies such as Russia (OPEC+) and committed to raising production by 400,000 barrels per day.
However, OPEC + has been facing production and capacity issues across multiple markets, which has contributed to tightening supplies.
Tight supply has given impetus to the latest price rally, with OPEC’s report revealing the group undershot a pledged oil-output rises in December.
OPEC+ aimed to raise output by 400,000 bpd a month, with about 253,000 barrels per day of that due to come from the 10 OPEC members covered by the deal, but production has increased by less than that as some producers struggle to pump more.
Libya and Nigeria both had a drop in output alongside gains in Saudi Arabia and elsewhere.
Speaking to City A.M, OANDA’s senior analyst Craig Erlam argued the latest report confirms “what the market has been pricing in for weeks”.
He said: “Demand remains robust and efforts by OPEC+ to restore output, insufficient. With the group expecting demand growth to remain strong this year, we’re going to need to see greater effort to meet production targets or prices will only head in one direction. One ray of hope is US shale, as companies won’t be able to resist investing at these prices. But that could take some time and keep prices high for now.”
Commerzbank was also optimistic about demand being maintained throughout the year, especially with Asian economies rebounding from the pandemic
It said: “According to traders, the premium for ESPO, which is a favorite grade for Chinese refineries in particular, has risen to its highest level since November. Furthermore, the energy consultant firm FGE cites the additional tailwind for the physical market generated by the strong refinery margins.”
It now questioned whether OPEC and the International Energy Agency would correct previous expectations of oil market being oversupplied by over a million barrels by the end of this quarter.
Goldman Sachs remains less focused on supply and demand factors, but instead anticipates prices will rise because of bearish investor behaviour towards commodities.
In an investors note, the bank said: “We are not forecasting Brent trading above $100 per barrel on an argument of running out of oil as the shale resources is still large and elastic. This mechanism will, however, likely require ever rising oil prices given the reluctance to invest in oil during the energy transition and the gradual depletion of shale’s geological, midstream and service capacities.”
It is not the only group to predict $100 per barrel prices this year, with OANDA making the same judgement call last week.
Geopolitical tensions drive oil price rallies
There are also growing concerns of potential conflict between Russia and Ukraine, with the Kremlin positioning over 100,000 troops near Ukraine’s border and NATO
Alongside disrupting Europe’s gas price, this could also cause severe supply chain issues while any reprisals such as economic sanctions would also drive oil prices.
NATO has invited Russia to a fresh series of talks to discuss European security and arms controls as the alliance scrambles to avoid a possible Russian attack on Ukraine.
The organisation’s secretary general Jens Stoltenberg has invited Russia to a fresh round of talks, having met with German chancellor Olaf Scholz.
He said: “The main task now is to prevent a military attack on Ukraine. We are willing to listen to their concerns but we will not compromise on core principles. We must remain clear-eyed about the prospects of progress but … will make every effort to reach an agreement.”
Stoltenberg’s offer follows inconclusive meetings between the US and Russia last week, and a rare convening of the NATO-Russia Council.
There have also been disruptions in the Middle East, as Yemen’s Houthi group attacked OPEC producer United Arab Emirates, escalating hostilities between the Iran-aligned group and a Saudi Arabian-led coalition.