Oil hurtles toward $100 a barrel first time since 2014

The rally in crude oil prices has gained momentum this week to close in on $100 per barrel upon the mounting tension between Russia and the West over Ukraine. The oil market was already bullish as demand is expected to surpass the pre-pandemic era in 2022. Meanwhile, the growth in oil supply fails to catch up with the powerful recovery of demand.

Seeing as high as $99/bbl on intraday trading, Brent futures settled at $96.84/bbl on Tuesday. WTI futures on NYMEX, meanwhile, closed the day at $92.35/bbl. This is the first time in 7 years that oil prices have come closer to this critical level, while dated Brent - the price for physical crude in the spot market - already saw trades above it last week.

Breaching the $100/bbl threshold is now a matter of time, which should catch no one by surprise at this point. Key to watch will be how long the oil futures will hold above $100 a barrel.

According to Bloomberg, the chief executive officer of Vitol Group, the world’s biggest independent oil trader, expects oil prices to be set for a “prolonged period” above $100/bbl over the next six to nine months.

Global demand to set fresh records by late 2022

Estimates widely call for a robust recovery of global oil demand from the pandemic. The key level of 100 million barrels a day in oil consumption has already been reached and this is expected to be exceeded in the second half of this year.

According to analysts, daily demand will rise by the end of this year to 1 million or 2 million barrels a day above end-2019 levels—the pre-pandemic era.

Demand from the largest consumer of the world, Asia, also remains healthy despite oil prices flirting with $100/bbl. Refineries in India, S. Korea and Taiwan have raised run rates due to recovering consumption and their margins for producing diesel and gasoline have almost surged to pre-pandemic levels.

Oil supplies under strict control, struggling to keep up with demand recovery

OPEC+ has been adamant about boosting oil production only gradually. Several OPEC+ members aren’t able to resume all of the output they shut down in 2020 due to under-investment and disruptions, according to market sources.

US shale gas drillers are also not eager to ramp up production, resisting the temptation to pump more oil as the market rallies. This is because they do not want to repeat the mistakes of the past by flooding the world with cheap oil.

The US shale industry has suffered from widespread bankruptcies since 2015, and therefore, they prefer to stick to a disciplined-growth strategy, although they can quickly ramp up production technically to pre-pandemic levels, unlike the OPEC+. They are aiming to limit the increase in oil and gas output to no more than 5% in 2022 despite surging crude prices.

Rather than increasing production, US shale drillers are focused on giving cash to shareholders. Considering that many shale companies can turn a profit with oil between $50 and $60 per barrel, they are upbeat about benefiting from crude oil prices around $100.

Iran could pump an extra 1 million barrels a day following the reportedly imminent nuclear deal with the US and provide some relief to supply concerns; however, sources argue that supply is already factored in for the second half of the year.