Oil has been rallying to start the year, with no shortage of bullish factors working to lift prices to their highest levels in more than seven years, raising expectations that the per-barrel cost of the commodity will soon reach $100.
Front-month global benchmark Brent crude hasn’t settled above $100 a barrel since September 2014, while U.S. benchmark West Texas Intermediate crude hasn’t traded at triple-digit prices since July 2014. However, prices have rallied sharply this week, though finished modestly lower on Thursday. March Brent BRNH22,
So far this year, prices based on the front-month contracts are up more than 15% for WTI, and nearly 14% for Brent, according to Dow Jones Market Data.
There are four factors behind oil’s rise, Naeem Aslam, chief market analyst at AvaTrade, explained in a recent market update.
The first is a “supply issue” linked to the Organization of the Petroleum Exporting Countries, he said. “The cartel doesn’t see any need to increase supply aggressively, and it has also said that it alone can’t bring higher oil supply.”
OPEC’s spare production capacity has fallen to 4 million barrels per day from its previous high of 11 million barrels per day, said Aslam. “So clearly, there isn’t much spare capacity left, and supply issues in the short term are likely to resist.”
Secondly, “investment and lending in the fossil fuel space have also dropped dramatically due to a shift towards renewable energy,” he said. “This is creating further pressure on producers who are failing to find investors for their projects.”
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Meanwhile, the coronavirus omicron variant “isn’t adversely influencing oil demand” as previously anticipated, Aslam said. While there have been some travel restrictions, those are being rolled back, he said. “The regional lockdowns that were introduced have only lasted for a very short period.”
And if the end of the pandemic is in sight, as some believe, that would mean more demand for oil, he said.
The oil market has also been closely following geopolitical developments, given their potential impact on global supplies. Unrest in Kazakhstan earlier this month raised concerns over the nation’s oil production, an attack on oil infrastructure in the United Arab Emirates, and a temporary disruption to crude flows through the Kirkuk-Ceyhan pipeline have contributed to the climb in oil prices.
The geopolitical situation is “becoming worse day by day,” said Aslam. U.S. President Joe Biden is “adopting a strong stance against Russia, and he has vowed to punish Russia if it attacks Ukraine. These geopolitical tensions are creating threats for supply disruptions, which many traders think is a negative factor but positive for oil prices.”
Read: Tensions between Russia and Ukraine aren’t fully priced into commodities
For oil, “I believe the $100 is a done deal now, regardless of escalation,” Aslam said.
Oil may need a trigger
However, some analysts believe the situation between Russia and Ukraine would need to worsen further for oil to reach triple digits.
Crude could go to $100 if Russia was to invade Ukraine, and there is “the perception of risks to oil exports, or sanctions from western powers that impact energy imports,” Marshall Steeves, energy markets analyst at IHS Markit, told MarketWatch.
He believes the omicron variant is the “wildcard” to the “extend that it has yet to peak in the U.S., even as some metropolitan areas are starting to see signs” of it peaking.
“Demand growth could roar back if omicron peaks in the next month in the U.S. and other OECD countries,” said Steeves.
