Benchmark oil prices are expected to continue rising this year, topping the $100 a barrel threshold, after clawing back much of the ground lost following the selloff sparked by fears over the banking sector, according to oil executives and analysts.
US crude extended its volatile run this week, logging its sharpest price gain in nearly six months. Oil prices rose more than 1% on Thursday, supported by lower US crude stockpiles and a halt to exports from Iraq's Kurdistan region.
Brent crude futures rose 99 cents, or 1.3%, to $79.27 a barrel. West Texas Intermediate crude rose $1.40, or 1.9%, to $74.37.
Craig Erlam, senior market analyst at OANDA, said the Brent and WTI benchmarks are currently trading around range lows seen from early December to early March, noting that any break back above the $100 psychological barrier would be closely watched.
“Oil prices have continued to recoup losses in recent days as sentiment has recovered, yields have edged higher, and global economic prospects have improved. Further upside could be on the cards,” said Erlam.
China's demand for oil is tipped to recover while Russia's exports are dented by sanctions, suggesting that oil prices will rise above $100 this year, Bloomberg reported Goldman Sachs (NYSE:GS) as saying. It quoted Jeff Currie, who heads commodities research at Goldman, saying that by May this year, “oil markets should flip to a deficit of supply compared to demand.”
Supply and demand mismatch
Africa Oil CEO Keith Hill pointed out that a lack of spending on oil production will drive prices higher.
Wary of supply increases and price declines, US oil companies have held on to their profits and been slow to dramatically expand production and invest heavily in new wells.
“I think it's pretty much physically impossible for oil not to be above $100 a barrel in the next five years for quite a bit of sustained time. The lack of investment in our industry over the past 10 years has basically made it impossible to keep up now with the growing demand,” Hill told Proactive.
Hill, who has worked in the oil industry for 38 years with oil majors such as Occidental Petroleum and Shell Oil Company, said the energy transition to the low-carbon industry of the future remains "one of the greatest challenges of all time."
"We have to be very careful about turning system A off prematurely. Renewables are going to be starting to catch up, but they're not going to be able to keep up with the sharp rise in energy demand, especially given that some of the oil is starting to decline,” noted Hill.
“If you look at the shale in the US, it's probably peaked and starting to decline. I think some of the big fields in the Middle East are getting very old and tired. I think you are going to see a supply-driven price squeeze for the next 5 to 10 years,” he added.
Capacity to surprise
Hill noted that oil prices always have the capacity to surprise on a short-term basis.
“Prices could fluctuate if there’s geopolitical risk or the global economy slows down due to a pandemic situation. They can go up or down," said Hill. “But the long-term view for oil prices is intact. We don't have enough supply to meet demand. Five years ago, when people were saying lower for longer, I was the only oilman that was standing up and saying, we're going to see oil at $100 again and of course, it happened.”
Hill’s Africa Oil is the only public-listed independent oil and gas company with exposure to the exciting Venus light oil discovery and associated gas field, in the Orange Basin, off the coast of Namibia. Wood Mackenzie has described it as the “world's largest oil discovery in 2022.”
The war in Ukraine remains a major variable in the worldwide supply outlook since Russia normally supplies one out of every 10 barrels in the global 100-million-barrel-a-day market.
Contact the author Uttara Choudhury at uttara@proactiveinvestors.com
Follow her on Twitter: @UttaraProactive