Alex Lawler

LONDON, (Reuters) – Oil’s rally could continue in the coming months because of recovering demand and limited capacity at OPEC+. Prices could surpass $100 a barrel. This is according to OPEC officials.

After averaging $110 per barrel for the past two years, oil traded last at $100 per barrel in 2014. As the global economy recovers from the crisis, rising shale production and increased competition among top oil producers led to lower oil prices.

The prospect of seeing a rebound to triple-digits had been a distant possibility until recently. However, markets have quickly recovered from the unexpected slump in demand that was caused by 2020’s pandemic. Oil prices were at one time negative.

After a 7-year period of steady growth, Brent is now trading at $87 a barrel. This follows a 50% increase in demand for 2021. However, OPEC and its allies (known as OPEC+) only moderately increased their supply restrictions.

Further gains were achieved in 2022 by a combination of outages elsewhere and a small impact from Omicron Coronavirus variant.

The Organization of the Petroleum Exporting Countries doesn’t publish any oil price forecasts, and it hasn’t had an official price target in years.

Ministers and officials from OPEC, Russia and its allies, a group called OPEC+ are reluctant to talk about the likely direction of prices or preferable price levels on record.

Reuters talked privately with five OPEC officials who are members of OPEC+ and OPEC+ about $100 oil. One of them said it wasn’t possible, and the other said they didn’t rule it out.

According to an OPEC source, a higher producer predicted that oil prices will rise in the coming months.

According to these conditions, oil’s price may hover around $100. However it won’t be stable.

OPEC+ formed in 2016 in an effort to end a glut in supply. They made record cuts of 10,000,000 barrels per hour (bpd) in 2020 to meet 10% of global demand.

As the demand improves, OPEC+ is aiming to increase output by 400,000 bpd each month. However, actual production growths are falling as producers are unable to pump more or are adhering to quotas.

“OPEC+ is having difficulty producing at its target level due to the lack of investment in oil industry in the past two years and Omicron’s mild effect on short-term crude oil demand,” said the source, adding that these two factors are major drivers for the rally.

According to International Energy Agency figures, OPEC+ production fell 650,000 bpd from its target in November.

Russian President Vladimir Putin predicted that oil prices could rise to $100 in an uncommon oil price prediction made by an OPEC+ leader.

Goldman Sachs (NYSE 🙂 Tuesday stated that Brent is primed for a rise of over $100 in the future.

‘HEATING UP’

OPEC+ has its own limitations, but they are part of a bigger trend. This is due to COVID-19’s effects which have led to a dearth of investments in the oil sector. European oil companies are also cutting back on investment in projects, as they feel pressured to invest more in cleaner fuels.

The result is that only a handful of larger OPEC producers, including Saudi Arabia, United Arab Emirates and Iraq, has significant extra output capacity. Iran has 1,000,000 bpd more idle capacity but this is not available on the market at present due to U.S. Sanctions.

According to another OPEC source, outages and strong demand drove the rally. Further gains will not be affected by another drop in demand. However, it is possible to see a return of $100.

“The market has been heating up,” he stated. He said, “I don’t know the answer and won’t speculate”. He also mentioned that there is a possibility of $100 rally. But if there are shortages, the prices will rise as long COVID-19 does not again impact oil demand over the next months.

DEMAND RISK @ $85+

The price rise allows OPEC+ and OPEC+ the opportunity to recover revenue that was lost in 2020. However, not all members are comfortable at such high prices.

According to another OPEC+ source, “With these prices it is a risk for demand.” Personally, $85+ is not something I would support for very long. For sustained demand growth, it is quite high.

He didn’t anticipate $100 oil, even though jet fuel demand continues to be below pre-pandemic levels.

OPEC blamed rising energy costs and a decline in Brent’s demand forecast for the fourth quarter of 2021. This was just a few months after Brent reached a record $86.

OPEC+ has the potential to produce more oil, but only a handful of countries are able to do so. The only way to get this oil on the markets would be for countries with low production levels to make a change in their production, which would prove difficult politically.

In industry circles, spare capacity is often less than that listed in the names. Saudi Arabia’s reserve oil capacity was not measured at its maximum.

OPEC+ met January 4th and approved a nominal 400,000 bpd boost to its February output goal. It suggests that the gap between the actual and promised supply could grow further, without large producers compensating.

There is currently no indication that this has been considered. However, Fatih Birol (IEA Executive Director) on January 12 urged OPEC+: “There might be need for OPEC+…in light of strong demande growth as well outages in some key players… (to), revisit their policies with a hope that they continue to comfort market with additional volumes.”