POWER UP: Where are oil prices likely to go from here?
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It’s been impossible to miss the rising oil price if one drives (an ICE), thanks to the sticker shock when it is time for a refuel.
The benchmark Brent crude is currently trading around US$86.84 per barrel with analysts from JPMorgan flagging that US$150/bbl could be a reality.
Why? Glad you asked.
There are several reasons actually, and they’re all coming together to inflict pain at the pumps (and elsewhere).
First off – years of underinvestment in oil (and its stablemate gas) due to the shift away from fossil fuels to renewable energy.
While achieving net zero emissions to prevent climate change is an admirable goal, you can’t help but feel that we might have gone too far in one direction without considering that much of our power generation and transportation is still reliant on fossil fuels and will likely remain so for some years to come.
This underinvestment has meant that outside some of the biggest Middle Eastern oil producers and potentially the US shale oil sector, other major producers are finding that they are steadily reaching their capacity or noting that their oil fields are starting to decline.
US shale oil also appears to have abandoned its spendthrift ways – no doubt due to a number of bankruptcies in the past years – with companies keeping a close eye on their capital even as they slowly but steadily ramp up production.
This was certainly not helped by the fall in investment due to the downturn in prices caused by the COVID lockdowns impacting on demand in 2020 (negative oil anyone?).
OPEC has also been reluctant to speed up its return to full production both because its members are enjoying the benefits of high oil prices and also because some of them are actually incapable of meeting further increases in production.
Geopolitical tensions are another reason that oil prices have risen.
From riots in Kazakhstan to the ongoing tensions between Russia and Ukraine, the threat of further disruptions to oil supply have led to frantic buying of physical oil.
A lot of where oil prices will go depends on how the Russia-Ukraine conflict plays out.
Should Russia’s troop build-up on its neighbour’s borders prove to be sabre rattling, expect the market to breathe a sigh of relief and for oil prices to retreat – at least somewhat.
Should this be the case, current oil prices are also sufficient to support a significant level of shale oil drilling and completion in the US, which will rather ironically also act as a stop on prices going too far north.
There is also potential for Iranian oil to return to the market, though this will only happen if ongoing nuclear talks succeed – which most analysts doubt will happen anytime soon.
All bets are off should Russia actually invade Ukraine.
Ironically, continued high oil prices could also result in demand falling as consumers move away from the fossil fuel and accelerate the move towards renewable energy and electrification.
Electric vehicle adoption could also increase as concerns about the environment, the impact on pocketbooks and lowering cost of vehicles.