Geopolitical Troubles, Outage Adds to Oil Supply Concerns

Supply issues continue to drive U.S. West Texas Intermediate and international-benchmark Brent crude oil futures higher early Wednesday. Ahead of the opening, prices were underpinned by an already tight supply outlook amid troubling geopolitical issues in Russia and the United Arab Emirates (UAE). The markets gapped higher on the opening earlier today as traders responded to an outage on a pipeline from Iraq to Turkey.

At 07:23 GMT, March WTI crude oil futures are trading $85.31, up $0.48 or +0.57% and the March Brent crude oil futures contract is at $87.91, up $0.40 or +0.46%. On Tuesday, the United States Oil Fund ETF (USO) settled at $60.99, up $1.02 or +1.70%.

Prices Setting Up to Challenge $100

U.S. WTI and Brent crude oil futures appear to be poised to challenge $100 per barrel sometime this year, with or without the current supply issues. This is because there is a sizable supply deficit and the impact of the Omicron coronavirus variant on demand is far smaller than predicted.

This notion is supported by analysts at Goldman Sachs who said on Tuesday supply remains in a “surprisingly large deficit”.

Analysts also wrote that the hit to demand from Omicron will likely be offset by gas-to-oil substitution, increased supply distributions, OPEC+ shortfalls, and disappointing production in Brazil and Norway.

Goldman analysts said global oil demand is seen rising 3.5 million barrels per day (bpd) year-on-year in 2022, with fourth-quarter demand reaching 101.6 million bpd.

Goldman expects QECD inventories to fall to their lowest level since 2000 by summer, and OPEC+ spare capacity to decline to historically low levels, given the lack of drilling in core-OPEC and Russia struggling to ramp up production.

“We expect the increase in OPEC+ production to fall even further short of quotas in 2022, with an only 2.5 million bpd increase in production expected from the next nine hikes.”

Furthermore, higher prices will allow OPEC to fall behind its monthly ramp up path slightly in order to preserve spare capacity, with the acceleration in shale production growth providing necessary inventory buffer, Goldman added.

Daily Forecast

Concerns over Russia, the world’s second-largest oil producer, and the UAE, OPEC’s third-largest producer, are adding to the supply fears. The outage in Turkey is just the cherry on top of an already bullish situation.

Crude oil is shaping up to be bullish over the long-run because demand is on pace to outstrip supply.

Prices are expected to be bullish over the short-run because the issues facing Russia, UAE and Turkey could cause an immediate drop in supply if their situations aren’t rectified quickly.

I just want to emphasize that WTI and Brent don’t need the current issues to get to $100 per barrel. Prices will get there sooner if these problems become major issues, but given the supply/demand time table, they are likely to reach this critical level during the second half of the year.