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Business

5 reasons why oil prices could soon hit $100 a barrel

Oil is trading at a seven-year high as strong demand faces off with supply troubles and waning inventories. For consumers reeling from high energy bills, more pain could be in store with the rally yet to run its course.

A person putting gasoline in their vehicle

High fuel costs are complicating efforts to tame inflation

Oil prices are just shy of the $90 (€79) a barrel mark — a level that the commodity last traded at back in 2014 — propped up by strong demand and easing concerns around the economic implications of the omicron variant.

Benchmark crude contract Brent North Sea was trading at around $88 per barrel on Wednesday, up more than a quarter since the recent lows seen in December following the discovery of the new COVID variant. West Texas Intermediate (WTI) futures, the US benchmark, was hovering above $86 a barrel.

Analysts, including at US investment bank Goldman Sachs, are forecasting that oil prices could breach $100 a barrel this year, further complicating the fight against inflation, which has reached a  high in advanced economies like the United States and Germany.

"Energy traders are bracing for oil prices to reach $100 a barrel as crude demand appears to be back on track to return to pre-pandemic levels and as supplies will likely remain very tight for the rest of the year," Edward Moya, senior market analyst at OANDA trading group, told DW.

Here are five reasons that could drive up oil prices above the $100 mark.

Robust demand for oil

Oil is witnessing strong demand despite soaring COVID cases globally amid signs that the omicron variant is not as big a setback to fuel demand as initially feared.

Air travel, while still well below pre-pandemic levels, has largely withstood the omicron wave so far, pushing up demand for jet fuel in Europe. Diesel prices are also getting a boost from demand for heating oils amid soaring natural gas prices, transportation and industrial fuels.

Aircraft taking off from Chicago airport

Air travel is expected to continue its recovery in 2022

"The omicron hit to on-road and jet demand appears smaller than that of delta outside of China so far, of 0.7 mb/d [millions of barrels per day (bpd)] in January and is expected to dissipate by March," Goldman Sachs analysts wrote in a note to clients.

Demand for the fossil fuel is only expected to increase during the summer holidays in the Northern Hemisphere as people set off on vacations.

Supply constraints

While unplanned outages in Libya, Kazakhstan and Ecuador have added to the existing supply constraints, the overall supply situation isn't going to get better any time soon.

The Organization of the Petroleum Exporting Countries (OPEC) and allies led by Russia, an alliance known as OPEC+, have been struggling to restore the record output cuts they implemented when demand sank during the first coronavirus wave in 2020.

While the alliance has been boosting its production quotas by 400,000 bpd every month, the actual output increase has been falling way short as oil producers from Russia, the second-largest OPEC+ producer, and Nigeria struggle with lack of investments and operational issues.

That leaves only OPEC heavyweights Saudi Arabia, the United Arab Emirates and Iraq with spare capacity to boost production at short notice. But the reserve capacity is said to be at the lowest level in years, and not enough to enthuse confidence among traders that it could act as a shock absorber in an event of a supply disruption, especially when global oil inventories have fallen below the pre-COVID levels and continue to shrink.

Watch video 16:14

Who's to blame for the energy crunch?

Russia-Ukraine tensions

Rising tensions between Russia and the United States and its Western allies pose a major risk for the oil markets. Washington has warned Moscow against invading Ukraine as Russian troops amass on the Ukrainian border.

"A war between Russia and Ukraine would most likely rise natural gas prices dramatically, and oil will be indirectly affected by the gas-to-oil switch in the power generation," Claudio Galimberti, senior vice president of analysis at Rystad Energy, told DW. "Direct impact on oil production facilities in Siberia is highly unlikely."

Middle East and other geopolitical troubles

Oil markets are particularly sensitive to geopolitical tensions. So, if the political and security situation in major oil producers like Kazakhstan and Libya worsens then oil prices could quickly head northwards.

Oil supplies also remain vulnerable to escalating tensions between Saudi Arabia and Iran in the Middle East following a drone attack by Yemen's Iran-aligned Houthi group on the UAE.

"Geopolitical tensions are the biggest wildcard for crude prices and will likely be the primary catalyst to keep prices heading higher as much of the demand recovery has been priced in," Moya said.

Wall Street coming to the party

Bloomberg columnist and author Javier Blas writes that once oil hits $90 a barrel level, it will get traders on Wall Street excited who will eventually take oil prices above $100 a barrel.

"Supply and demand fundamentals drive oil prices. Things like OPEC+ production plans and US driving patterns matter the most — until they don't," Blas wrote in a column. "That's when the wizardry of Wall Street takes over, giving prices a push up or down beyond what the physical fundamentals warrant. The oil market is on the cusp of one of those moments."

Blas points to strong buying interest from oil traders who have built a strong portfolio of call options — a contract that gives them the right to buy oil at a specific price and date — when oil demand and prices had tanked during the pandemic. Many of those call options are for oil prices above $100 a barrel.

"Many hedge funds and other large investors are patiently awaiting a much bigger prize — for oil prices to rise further so they can exercise their call options in full and enjoy the right to buy crude below its market price," Blas said.

Edited by: Hardy Graupner