Oil rose early on Wednesday to the highest level since 2014, with Brent approaching $90 a barrel, as resilient global demand despite the Omicron wave and fears of a Russian invasion of Ukraine supported prices.
As of 9:24 a.m. EST on Wednesday, before the weekly U.S. inventory report from the EIA, WTI Crude prices were up 1.07% at $86.52, and Brent Crude was less than a dollar below $90—at $89.35, up 1.30% on the day.
Prices rose as the tension between the West and Russia over Ukraine continues.
On Tuesday, U.S. President Joe Biden said, commenting on the Russia-Ukraine crisis: “I have made it clear to — early on to President Putin that if he were to move into Ukraine, that there’d be severe consequences, including significant economic sanctions, as well as I’d feel obliged to beef up our presence — NATO’s presence in — on the eastern front: Poland, Romania, et cetera.”
Fears of disruption of energy supply from Russia, a major exporter of oil and natural gas, especially to energy-crisis-stricken Europe, have rattled the commodity markets in recent days.
On Tuesday, the American Petroleum Institute (API) estimated the inventory draw this week for crude oil to be 872,000 barrels after analysts predicted a draw of 400,000 barrels.
“Last night the American Petroleum Institute reported a 0.9-million-barrel drop in US crude inventories, and the continued tightness can be seen in timespreads which continue to widen, especially in WTI where the March-April spread trades at a very elevated $1.2 per barrel,” Saxo Bank said in a daily market commentary on Wednesday morning.
In another bullish development for oil prices, more Chinese are expected to travel for the Lunar New Year holiday this year than in the previous two years, despite the Omicron spread, in a boost to fuel consumption in the world’s largest crude oil importer, according to data cited by Bloomberg.
By Tsvetana Paraskova for Oilprice.com
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Many powerful bullish factors have joined hands for the first time since 2014 to support the global oil demand. Among these factors are a roaring economy, a tight market, a global underinvestment in oil and gas since 2019, a reduction of 399 million barrels from the international oil inventories from a year ago, a lessening in global concerns about the Omicron variant and reports about a shrinking OPEC+ spare production capacity. To this could be added the rising geopolitical tensions over Ukraine.
And to top all the above factors, there are clear indications that global oil demand is now entering a supercycle phase defined as a sustained expansion usually driven by robust growth in demand. This means that crude oil prices are projected to continue surging at least for the next five years which could take the Brent crude price to $110-$120 a barrel.
The global oil market is already tight and will get even tighter in coming years as a result of a surging demand and lagging supply. Therefore, it wouldn’t be surprising if we see $100 oil in the fourth quarter of 2022 or the first quarter of 2023.
The quintessential question is whether OPEC+ can add to its current spare capacity to help balance the market in 2022. I believe it can to some extent with help from Saudi Arabia, Russia, UAE, Kuwait and Iraq but I doubt whether it can generate a spare capacity big enough to stem the continued surge of oil prices in the next few years particularly with oil market entering a supercycle phase. Moreover, its takes at least five years before they can expand capacity in a meaningful way.
Dr Mamdouh G Salameh
International Oil Economist
Visiting Professor of Energy Economics at ESCP Europe Business School, London