Oil prices are bullish in the London session today, with the brent trading closer to the $90 trading range, a seven-year high it hit last week on expectations that a limited production increase by major oil producers will likely cause a supply shock which will ultimately mean higher oil prices, as there is a solid post-pandemic recovery in fuel demand.
The global benchmark, the Brent crude is up 0.4%, currently trading at $89.60 a barrel while the United States’ benchmark, the West Texas Intermediate crude is also up 0.4%, currently trading $88.47 a barrel, having gained 1.5% in the previous day.
Both benchmarks hit their highest levels since October 2014 on Friday, at $91.70 and $88.84, respectively. They have also both gained about 17% in January, the biggest monthly gain since February 2021, amid a supply shortage and geopolitical tensions in Eastern Europe and the Middle East.
What you should know
- Market analysts and Reuters sources widely expect that the cartel, the Organization of Petroleum Exporting Countries and its allies (OPEC+), to keep to its policy of gradual production increases when it meets on Wednesday.
- A Reuters survey revealed that the OPEC+’s oil output in January has again not met up to expectations of what was agreed in the deal among the allies, highlighting some producers’ struggle to pump more even as prices are high. Nigeria and Libya are prime examples of this situation.
- Another factor affecting the price of oil is the geopolitical tensions between Russia and the West. Russia, the world’s second-largest oil producer, and the West have been at loggerheads over Ukraine, fanning fears that energy supplies to Europe could be disrupted.
- The United States and Britain are prepared to punish Russian elites close to President Vladimir Putin with asset freezes and travel bans if Russia enters Ukraine, Washington and London said this on Monday as tensions also spilled over at the United Nations.
What they are saying
Hiroyuki Kikukawa, general manager of research at Nissan Securities stated, “The market is maintaining a bullish tone on expectations that supply tightness will continue as demand is picking up, with receding fears over spreading Omicron coronavirus variant. All eyes are on OPEC+ decision as well as development of the conflict between Russia and the West over Ukraine.”
Naohiro Niimura, a partner at Market Risk Advisory, a research and consulting firm stated, “We expect little surprise from the OPEC+ meeting, though there is a small chance that Saudi will voluntarily increase output outside the OPEC+ framework to avoid the fall in demand caused by higher prices. If no surprise, Brent is expected to stay between $85 and $95 for a while due to concerns over supply shortage amid rising geopolitical tensions.”
Bottomline
The risk of geopolitical disruptions to oil supply at a time of already tight inventories due to the strong post-pandemic recovery has been the major cause of the oil price rally we are seeing today. It also suggests that the current price rally has further to run.
