Oil on the boil

KARACHI: Rising geopolitical tension, fears of supply disruption and a surge in the post-Covid demand are dragging crude oil prices towards $100 a barrel in the international market sooner than earlier predicted, risking the fragile global growth, analysts and industry players said.

Experts say oil at $100/barrel has become a high probability, as the markets digest major tailwind factors currently guiding the prices.

“The bet on $100 has gone from a long shot to a bullish and already discounted Wall Street estimate with some even calling for higher estimates above the $120 range,” Devesh Mamtani, chief market strategist, Century Financial, said.

Industry veterans who have survived the major boom-bust energy market cycles are now seeing these market levels as unprecedented.

“Prices are now on track to give a breakout above their seven-year high, or 2014 levels,” he said.

Mohammed Shaheen, CEO of Seven Capitals, said that the oil is witnessing strong demand, amid signs that the Omicron variant is not as big a threat to the demand, as it was feared.

“Air travel, while still well below the pre-pandemic levels, has largely withstood the Omicron wave so far, pushing up the demand for jet fuel in Europe. Diesel prices are also getting a boost from the demand for heating oils, amid soaring natural gas prices, transportation and industrial fuels,” Shaheen said.

Goldman Sachs expects oil prices hitting $100 per barrel in the second half of the current year, citing a lower-than-expected hit to the demand from the Omicron coronavirus variant coupled with increased supply disruptions and Opec+ shortfalls.

“This has kept the global oil market in a larger deficit than even our above consensus forecast,” Goldman said in a note on January 17, 2022.

Goldman sees Brent prices at $90 per barrel in the first quarter of 2022, $95 in the second quarter and $100 per barrel in the last two quarters.

The investment bank raised its Brent oil price forecasts for 2022 and 2023 to $96, $105 per barrel from $81, $85 per barrel, respectively.

“Importantly, we are not forecasting Brent trading above $100 per barrel on an argument of running out of oil, as the shale resources are still large and elastic,” Goldman Sachs noted.

Morgan Stanley also raised its outlook for the commodity on the back of a “triple deficit” — low inventories, low spare capacity, and low investment.

Martijn Rats, commodities strategist and head of European Oils, Morgan Stanley, in a note said that it now sees Brent crude oil’s international benchmark jumping to $100 per barrel by the third quarter of this year, updating its $90 per barrel forecast published on January 6.

The bank also said the supply capacity will shrink to two million barrels a day in the middle of 2022 from the current 3.4 million — levels both much-lower-than the 6.5 million a year ago.

The Organisation of the Petroleum Exporting Countries (Opec) has struggled to consistently hit its monthly production increases, as lagging investment in some smaller producers has eroded the steadily rising output from the members such as Saudi Arabia, the UAE and Iraq.

“Opec+ is pumping less than its 400,000 barrel per day (bpd) output commitment. Production from Opec+ countries increased by only 250k bpd in December, 63 per cent of the group’ s stated target. Similarly, for January, the group collectively pumped only 210k bpd, 53 per cent of the proposed target of 400k bpd. In addition, Russia and Nigeria continued to pump below their monthly quotas,” Mamtani said.

Oil inventories have declined and the companies are ramping up production slowly. Crude oil inventories at Cushing, Oklahoma, have been falling for the last four weeks, reaching what could be uncomfortably the low levels for the markets.

While it is not an assumption that the so-called tank bottom scenario would be reached, the low levels, nevertheless, are indicative of further bullish surges across the oil futures curve, with spot rates likely to benefit the most.

“By summer, we expect oil inventories in advanced economies to sink to their lowest level since 2000 because of the prevalent Omicron cases. If the policies aren’t developed to encourage needed production increase over the next decade or two, these excursions to $90 or $100 will become more frequent, and the price levels will move higher in an increasingly volatile fashion,” Shaheen said.

A faster pace of supply additions would erode the already narrow buffer of spare capacity within Opec+, held mainly by a few producers in the Gulf region, but the strain on spare capacity would become more apparent if the supply elsewhere were interrupted for a prolonged period.

Edward Bell, senior director, Market Economics at EmiratesNBD, wrote in a report that with the threat of a geopolitical incident in Eastern Europe hanging over markets, the near-term risks for oil prices look skewed to the upside.

“A conflict involving Russia, one of the world’s largest exporters of energy products, is an enormous binary risk for oil prices and the prospect of the US or European Union sanctions on Russian oil exports will keep a strong bid under oil for now,” Bell added.

Mamtani said that the Russia-Ukraine conflict is threatening to damage the gas flows from Russia to major European hubs.

“For markets, this will likely be a deja vu of sorts with the Russian annexation of Crimea in everyone’s mind. Russia’s forex and gold reserves (currently at its all-time high of $630 billion) have grown due to the rising commodity/energy prices and key fiscal reforms it
had implemented in the past. This will likely give the country some leeway in countering western sanctions,”Mamtani said.

With the changing scenario in the international oil market, economists and experts have warned the Pakistani government to take precautionary measures to mitigate the stocks from higher oil prices.

Ahsan Mehanti, managing director of Arif Habib Commodities, said that Pakistan spends billions of dollars on crude oil imports and a higher cost would not only impact its foreign exchange reserves but also build an inflationary pressure on its fragile economy.

“Oil prices are recovering to the pre-Covid levels. Pakistan is directly impacted with higher oil import bill, which lowered to $5 billion during the Covid-19 pandemic and now it is expected to cross $12 billion in FY22,” Mehanti added.

A A H Soomro, an independent analyst, said that the pressure on the rupee would increase. Inflation will spike further, forcing the State Bank of Pakistan to raise interest rates by another 100bps, if oil prices remain at $100.

“Inflation would increase further and the fiscal deficit would also rise, as spending would need to be curtailed if the government provides subsidies. Pakistan should hasten the transition to electric vehicles for reduced oil consumption and accelerate industrial growth to utilise spare capacity in generation,” Soomro added.