Oil price races higher as demand rebounds

Supply constraints, increased demand and the Russian threat to Ukraine are sending the oil price racing towards $100 a barrel.

Oil prices are racing towards $100 a barrel. Brent crude futures hit $96 a barrel early this week, the highest level in more than seven years. That reflected fears of an imminent Russian invasion of Ukraine, a risk that traders had largely ignored until now. “Russia produces ten million barrels of oil a day, roughly 10% of global demand,” says Clifford Krauss in The New York Times. A war, and resulting Western sanctions, could remove some of that supply from global markets.

This week’s jump shows traders starting to “price in a sizeable geopolitical risk premium” into oil prices, say Christopher Matthews and Collin Eaton in The Wall Street Journal. While Western governments are reluctant to sanction Russian energy, they may ultimately be forced to do so.

Demand exceeds supply

Oil markets were already tight. The Opec+ group of producers, which includes Saudi Arabia and Russia, is struggling to keep up with demand: it has been raising production quotas in response to a recovering global economy, but several members are pumping less than they planned. Total output was a record 747,000 barrels per day short of the collective quota in December, according to energy-research firm BloombergNEF. 

A slew of recent outages in Nigeria, Ecuador, Libya and Kazakhstan is keeping a lid on global supply, says Radmilla Suleymanova for Al Jazeera. At the same time, the Covid-19 Omicron variant has also failed to dent the world’s appetite for petroleum as much as had been feared at the end of last year. The International Energy Agency thinks that global demand for oil will return to pre-pandemic levels – roughly 100 million barrels per day – by the end of the year, up from the current level of 97 million per day, says The Economist. Some are more bullish: Opec+ expects demand to reach 103 million barrels per day.

Raising forecasts

Wall Street analysts have started to forecast $100 or even $120 a barrel oil, but not everyone is convinced. If Ukraine tensions cool and Washington manages to do a deal with Iran about its nuclear programme – which could bring one million barrels per day back onto global markets – then prices could yet fall. “The real wild card is shale,” says the Economist. US investors are thought to have lost $300bn in the last boom-and-bust cycle, but higher prices are tempting some oil prospectors to try their luck again. Not for the first time, American shale drillers may yet come to the rescue.

High oil prices are ultimately “self-correcting” because they encourage higher output, says Jeremy Warner in The Daily Telegraph, “but they can do an awful lot of damage in the meantime”. Oil appears to be following natural gas higher: European gas prices hit the oil-price equivalent of $350 a barrel late last year and are still trading at the oil-price equivalent of around $160 a barrel. That has given power stations in the US and Japan an incentive to shift from burning gas to burning oil for electricity, raising demand for the latter. Could oil spike as high as gas, towards $300 a barrel? “Perhaps not that high, but something much higher than now is certainly plausible.” 

Recommended

What is Rihanna's net worth?
Entrepreneurs

What is Rihanna's net worth?

Rihanna became the youngest self-made billionaire in 2022. Here’s how she made her money.
2 Jun 2023
Best savings accounts – June 2023
Savings

Best savings accounts – June 2023

Interest rates have been creeping up - we look at the best savings accounts on the market right now.
2 Jun 2023
Share tips of the week – 2 June
Investments

Share tips of the week – 2 June

MoneyWeek’s comprehensive guide to the best of this week’s share tips from the rest of the UK's financial pages.
2 Jun 2023
The best one-year fixed savings accounts - June 2023
Savings

The best one-year fixed savings accounts - June 2023

You can now earn 5% on 1 year fixed savings accounts - the best rate seen in 14 years. We have all the latest rates available now.
2 Jun 2023

Most Popular

June’s NS&I Premium Bond prize draw - are you this month’s millionaire?
Savings

June’s NS&I Premium Bond prize draw - are you this month’s millionaire?

Two fortunate NS&I Premium Bond winners are now millionaires. Find out here if you’re one of them.
1 Jun 2023
Housing slowdown ‘deeper than anticipated’ as property sales slump
House prices

Housing slowdown ‘deeper than anticipated’ as property sales slump

New data from HMRC shows a fall in property sales - now experts predict a delay to the housing recovery
1 Jun 2023
The best one-year fixed savings accounts - June 2023
Savings

The best one-year fixed savings accounts - June 2023

You can now earn 5% on 1 year fixed savings accounts - the best rate seen in 14 years. We have all the latest rates available now.
2 Jun 2023