As Bloomberg's Jake Lloyd-Smith wrote last night, oil markets are so bullish at present that forecasts for $100/bbl crude have become par for the course, which suggests that the threshold will be tested in 1H, "even if tensions over Ukraine cool," which now appears improbably and is why $100 oil may come as soon as tomorrow.
As the BBG reporter notes, "the three-digit-barrel forecast surfaced at least a year ago and used to turn heads given it was bold, and prices were way, way lower back then. It’s founded principally on the case that energy consumption returning to normal as the pandemic ebbs will underpin gains".
Goldman Sachs added its voice to the chorus not so long ago, when its chief commodity strategist and one of the closest-followed analysts on Wall Street, said he’s never seen commodity markets pricing in the shortages they are right now.
“I’ve been doing this 30 years and I’ve never seen markets like this,” Currie told Bloomberg TV in an interview last week. “This is a molecule crisis. We’re out of everything, I don’t care if it’s oil, gas, coal, copper, aluminum, you name it we’re out of it.”
Last week, JPMorgan echoed Goldman's lament, when the bank's global head of oil trading Jake Pashelinsky sent the following note around the bank's trading desks (full note available to professional subs):
I can’t stress enough how tight near term fundamentals are, we are running out of molecules and don’t have enough storage to bridge the gap to potentially looser 2h22 balances.
We have Cushing modelled at going into refinery maintenance season near tank bottoms and getting almost no resupply
this market will do anything to avoid running dry and the only real option in the near term is to price to demand destruction which is north of here.
Then, as Lloyd-Smith notes, the latest riff on the theme comes from Russell Hardy, CEO of Vitol Group, the boss of the world’s largest independent oil trader, who’d already flagged the possibility back in November. This is what Bloomberg reported overnight:
Oil prices could be set for a “prolonged period” above $100 a barrel over the next six to nine months, with the world setting fresh demand records this year, said Vitol Group Chief Executive Officer Russell Hardy.
Crude already surged to within a few dollars of that level earlier this month, as the recovery in fuel use from the pandemic started to run into supply constraints. In an interview in London with Bloomberg television, the boss of the world’s largest independent oil trader said the market will get tighter, with daily consumption set to rise well above pre-Covid levels by the end of 2022.
“The 100 million-barrel number is probably going to be exceeded this year,” Hardy said. “Demand is going to surge in the second half” if travel continues to return to normal.
Even before the potential risk of Russian sanctions, which could chop off a portion of the country's 7.5 million barrels of oil daily, energy supplies had been struggling to keep up with a robust economic recovery. Several OPEC+ members, plagued by under-investment and disruptions, aren’t able to revive all of the output they shut down in 2020. Many companies, from U.S. shale drillers to global supermajors, are focused on giving cash to shareholders instead of growing production.
The result is a surge in oil prices that’s feeding an inflationary spike. The situation threatens to derail the global economic recovery and inflict a cost-of-living crisis on millions.
“More crude is required,” Hardy said. With daily demand rising by the end of this year to 1 million or 2 million barrels a day above end-2019 levels, “the whole system is going to be fairly tight.”
Now throw in the risk of some Russian oil being sanctioned off from global markets and one can see why so many fear that this time there will indeed be blood.
And while we wait to see what the full Western response to Russian actions will be, Brent soared by more than $3 today and settled at $96.61. Expect it to briskly rise above $100 if Europe even so as hints that Russian energy output will be impacted by the upcoming sanctions.