Sentiment remains bullish as oil price reaches new height
After a pullback from near seven-year record earlier this week, oil price has stayed at high levels the last couple of days, and is expected to continue the momentum, if not rising to new highs, in the coming months as a result of recovery of demand and sustained supply risks.
Demand is anticipated to be back on track. Despite the rapid spread of the Omicron variant, countries around the world have generally imposed more modest restrictions, which have exerted a relatively small impact on demand, said Fu Xiao, head of commodity markets strategy at Bank of China International, in a written interview with Xinhua on Thursday.
“Recently, some European countries, including the UK, seemed to believe that the peak has passed and have begun to further lift lockdown measures, with demand recovering strongly,” Fu said, noting that both the International Energy Agency and the Organization of the Petroleum Exporting Countries (OPEC) expect oil demand to return to pre-pandemic levels in 2022.
On the supply side, the flare-up of geopolitical tensions in the Middle East pushed the West Texas Intermediate and Brent up to their highest settlements since October 2014 on Wednesday, based on the front-month contracts.
Yemen’s Houthi militia claimed responsibility on Monday for a military operation that struck areas inside the United Arab Emirates (UAE), an active member of the Saudi-led military coalition. The announcement came just after three petroleum tankers had exploded in a fire near the storage facilities of the Abu Dhabi National Oil Company.
Concerns over the security of oil supply have partly dissipated since then, as “it became apparent that oil flows along the Ceyhan pipeline would return to normal fairly quickly,” said a report by the ING Group, a financial services company, on Thursday.
However, some market analysts still see shadows looming over the oil markets. Although the Houthi’s attack did not affect the UAE’s oil production, the possibility of yet another conflict might raise questions about the stability of the oil supplies from the Middle East, Fu said, noting that the UAE contributed a significant share to the December 2021 output growth of OPEC Plus.
He also noted that the growth in OPEC Plus oil supply was less than expected and that the production growth in non-OPEC countries such as Brazil and Norway has been slowing down as well.
As a result, the price of oil may rise further, or stay at the current high level.
Another ING Group report said Tuesday that the growing geopolitical risk “comes at a time when there is already plenty of concern in the market over the potential impact of an escalation in tensions between Russia and Ukraine. These growing risks, combined with worries over OPEC spare capacity, have meant that sentiment in the oil market has remained bullish.”
Caroline Bain, chief commodities economist at Capital Economics, a London-based independent economic research consultancy, has expressed a cautiously optimistic view about price developments in 2022.
“We continue to expect energy prices to fall this year, but the latest developments on supply suggest that they will not fall by quite as much as we previously thought,” she said on Wednesday.
Bain said Capital Economics has made an upward revision to the oil price forecast mainly because of the lower growth in OPEC Plus supply.
“OPEC consistently failed to meet its own output targets in 2021 and this looks likely to continue. Russia is also struggling to meet its target. Admittedly, we have revised up our U.S. output forecast, but we still expect it to finish 2022 below its pre-pandemic high,” said the economist.