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As the crude oil price approaches $100 a barrel, a level last seen in 2014, the immediate question is how sustainable these price levels will be in the future.
Historically, crude oil prices have not only reached but have also exceeded the $100 a barrel benchmark twice before, as unbalanced market fundamentals left the market in search of equilibrium price while dealing with a low stock of crude oil. It should be kept in mind that both events occurred before the OPEC+ was formed.
In mid-2008, prior to the financial crisis, the price of Brent crude oil reached $140 per barrel (monthly average price/in “real” terms) supported by a robust South Asian oil demand. Nevertheless, Brent prices hovered above the $100 per barrel between early 2011 and the third quarter of 2014, the longest period the prices stayed above $100.
It was a consequence of weak supply fueled by disruption in Libyan production and the so-called Arab Spring. The increasing popularity of shale oil in the following years lowered these prices and unbalanced market fundamentals eventually led to the signing of a deal between OPEC and non-OPEC participants in late 2016.
This time both uneven market fundamentals, a surprising demand along with sluggish growth in supply have contributed to the current prices. The oil demand has strongly bounced back following the easing of pandemic-induced restrictions, particularly in the transportation sector, while supply has been affected by limited spare capacity and underinvestment in the oil and gas sector.
Of course, the market is not perfect, and one or more factors may change at any time. Nonetheless, over the short to medium term, the upside potential is much stronger than the limited downside.
A deeper look into the factors impacting the demand in the shorter term will include the Ukraine-Russia crisis. The sentiment for disruption in supply is certainly a worrying factor for the market. The stalling factors in the Iranian nuclear deal and strong gasoline demand in the US, despite high retail prices, are also contributing factors to the current healthy crude oil prices.
In the second quarter, the oil demand is projected to continue rising despite historically low second-quarter demand. According to OPEC’s oil market report for February, the consumption level is expected to increase by 600,000 barrels per day in the second quarter. Most of this added volume is a result of continuing recovery of oil demand, in transportation fuels (in both developing and developed economies). Most countries are further relaxing COVID-19 measures signaling that we might finally be approaching the end of the pandemic.
The same report highlighted that, on the supply side, production is projected to increase by around 100,000 barrels per day between the two quarters leading to an increase in the call on OPEC crude by 500,000 barrels per day. When compared with the same period last year, demand for OPEC crude oil in the second quarter of 2022 is forecasted to be higher by 1.3 million bpd.
The International Energy Agency has made significant revisions to its baseline estimate of global demand, increasing it by 800,000 bpd following a reassessment of the demand from the petrochemicals sector in Saudi Arabia and in China in 2007. This is illustrative of further tightening fundamentals in the market.
The downside risk is increasing inflation, which may dampen consumer sentiment and maybe a wild card that ends up disrupting the current path of growing tightness in the global oil market. However, the elevated level of household savings along with mega stimulus programs should limit its negative impact.
As the situation continues to evolve, we may need to adjust our spending patterns and consumption habits to align them with the current energy prices, which may remain with us in the coming months, maybe years.
• Hassan M. Balfakeih is an oil demand specialist and former chief oil demand analyst at OPEC Secretariat.