Oil price hits $85 a barrel with more rises in the pipeline

At the end of last year Daniel Yergin, one of the world’s shrewdest oil gurus, predicted in a rare interview with CNBC that oil prices would hover between $65 and $85 per barrel this year and that $100 oil is unlikely “unless some big geopolitical turmoil happens.” 

The author of the Pulitzer-winning book, The Prize: The Epic Quest for Oil, Money and Power, and now vice chairman of IHS Markit, the US information group, added that US oil production is back and set to increase in 2022 after more than a year of OPEC and its allies “running the show.” 

Well, Yergin might be spot on with all his forecasts. Earlier this week oil prices soared to a seven-year high, with futures climbing to $85.74 a barrel, the highest since October 2014, on rising demand coupled with tightening supply.

However you look at it, oil is back in fashion. Traders are paying over the odds for the liquid gold as demand soars as the pandemic beats a retreat and manufacturers step up production of everything from cars to construction while the return to air travel is driving the need for diesel and jet fuel.

At the same time, world supplies have been squeezed because of problems in Libya, the drone attack on oil facilities in the United Arab Emirates – the third biggest producer in OPEC – and Russia’s decision not to pump gas to Europe via the Yamal pipeline until February. 

Yergin’s second point, that $100 a barrel is likely in the event of geo-political turmoil, also looks prescient. Already this week the spot price of Brent crude has been close to $90 a barrel as relations between Russia and Ukraine look more fragile by the day and which may escalate into a full-scale invasion. 

These heightened tensions between Russia and Ukraine – and NATO – have huge implications not only because of the human cost of war but the impact on oil and gas prices, and supply. 

Indeed, all parties are caught in a classic game of mutually assured destruction or co-dependency as President Putin’s Russia supplies about half of Europe’s gas – both LNG and through the pipelines.

If Putin were to declare war on Ukraine, he is also likely to turn off Europe’s gas supplies which is why winter is the time he has chosen to manoeuvre, to hit the West when the weather is at its coldest.

But Putin knows he will lose out in two respects; loss of revenue from gas supplies while Europe’s leaders punish him with economic sanctions. 

Until now, most of the attention in the energy markets has been focused on the sharp rises in gas prices, leading to fears across the world that consumers are – and others soon will be – facing eye-watering jumps in their energy costs. 

Energy bills are already soaring across Europe while here in the UK, several energy suppliers have gone bust or been bailed out ahead of the price cap being lifted in April.

What the policy-makers and politicians appear to have missed is that the price of oil has been creeping up in the background from an average of around $69 a barrel last summer to today’s new high of $85. 

Yet oil is still by far the biggest single source of energy in the world, makes up a third of global energy supplies and is forecast to grow even bigger.

Coal is the next largest source, at 27% of all supplies, followed by gas at 24%. In contrast, nuclear energy makes up 4%, hydro provides 6% and renewables 5%. 

Which is why Yergin was also forecasting that the US will increase its oil output by as much as 900,000 barrels per day, taking production back to levels last seen in 2019.  

In 2019, the US produced 12.29 million barrels of crude oil per day. That was slashed back to 11.28 million in 2020, then cut even further to 11.18 million in 2021 because of reduced demand due to the pandemic. This year, forecasts are that production will recover to 11.85 million barrels.

With inflation soaring in the US to a 40-year high, the Biden administration is clearly desperate to contain energy costs which have risen by about 30% over the last year. 

As Yergin also noted in his interview, he had been party to two telephone calls where the US energy secretary asked the big oil companies to up their production as swiftly as possible.

However green he might want to be, Biden cannot afford politically for voters to pay such high prices for their energy and needs to persuade his US producers to increase their pumping. 

No wonder the Americans are so worried. On Tuesday, the international benchmark Brent crude was trading at $88.22 per barrel while the American benchmark West Texas Intermediate (WTI) was at $85.59 per barrel, prompting the US Energy Information Administration (EIA) to lift its 2022 forecast for global crude oil prices by more than 7%. 

What’s even more interesting is that the EIA reckons global oil consumption will grow by 3.6 million barrels per day in 2022, reaching 100.5 million bpd and by 1.8 million bpd in 2023 to 102.3 million bpd. 

However, it also anticipates that global oil production will outpace global oil consumption this year and next, resulting in rising global oil inventories and downward pressure on prices in 2023.  

But not all oil experts agree. As the economist John Kenneth Galbraith said so brilliantly about forecasting: “We have two classes of forecasters: those who don’t know — and those who don’t know they don’t know.”

But there is one energy markets analyst, John Kemp of Reuters News, who has a pretty good stab at peering into the future by asking some of the top experts in the business what they think they do know. 

In his seventh annual survey of forecasts based on 1,000 responses out of a questionnaire emailed to more than 10,000 energy market professionals, Kemp suggests that oil prices will exceed pre-pandemic levels over the next few years. After that, neither he nor the pundits were so sure. Overall, Kemp says Brent crude is expected to average $80-85 a barrel through the middle of the decade, up from expectations of $70 before the COVID-19 pandemic took hold in 2020.

The survey concludes that expected prices are mostly $10-15 a barrel above where futures were trading at the time the survey was conducted in mid-January, compared to a pre-pandemic premium of $10 or less. More interesting, his respondents agreed that over the next four years prices would range between $70 and $90. Some professionals could see prices of $120 to $150 over the next five years.

In another survey, Goldman Sachs is going for $100 a barrel in the third quarter.

There’s a lesson here. In the short-term, the world will keep guzzling oil, probably for decades to come, to help smooth transition to new sources of cleaner energy. In the meantime, smart investors will stay with the oil giants like BP and Shell and the new boys on the block buying up the “stranded assets” sold by the legacy oil giants under pressure from the asset managers who have turned green at the gills. As they say, what goes round, comes round.