An Aberdeen economist sees high oil prices sustained in the medium term, as Brent crude prices this week rose above the $90 per barrel mark for the first time since 2014.
Aberdeen University professor of petroleum economics Alex Kemp says he expects oil prices to remain “reasonably high” in the coming months, as supplies remain steady amidst a combination of rising demand and fears of escalating tensions in Ukraine.
As of 3pm Friday, Brent crude had reached a high of $91.68 per bbl, while WTI peaked at $88.84.
Meanwhile, several major banks have forecast triple-digit oil within the second half of this year.
Professor Kemp said the origins of the price movements lie in the OPEC+ announcement of April 2020, in which the group agreed to broad production cuts averaging around 23% in the wake of plummeting demand as result of Covid-19.
He noted that at the time that many pundits were of the opinion that demand of 100 million barrels per day was unlikely to be seen again.
“Well, they’ve turned out to be quite wrong,” he said.
Instead, better-than-expected global growth has stoked realistic expectations of sustained demand at or above pre-pandemic levels.
Meanwhile, the impact of reduced investment is beginning to bite, choking a ramp-up in new supplies.
“That’s the main reason why the oil price has come up quite strongly recently. OPEC+ have kept broadly to their promises, and demand has continued to grow well above what a lot of people thought,” he continued.
“I would expect the price to keep reasonably high, not necessarily $90 – there’s usually some volatility – but to keep reasonably high.”
Much of this hinges on expectations of global GDP growth, but Prof Kemp added that: “If all that looks favourable then the price could go up a bit more in the short term.”
‘Inflation immunity’
Rystad senior oil markets analyst Louise Dickson noted Thursday that markets showed “inflation immunity” as crude benchmarks rose despite an announcement by the US Federal Reserve that an interest rate hike will come in March – a statement that would typically prove bearish for prices.
Ms Dickson said that continued uncertainty surrounding military tension in Russia was also stoking prices.
“Markets should have calmed somewhat on the Fed news and the reaffirmation of the slowing of the economy, posing a rise to GDP and oil demand, but the short supply market and geopolitical tensions kept Brent crude prices at highs not seen since the pre-oil price crash of autumn 2014.”
In the meantime, attention will turn to next week’s OPEC+ meeting on February 2.
“The supply impetus that could calm markets and quell the demand for more production will need to come from OPEC+ and be steered by the member with the largest spare capacity, Saudi Arabia, when they meet next week,” she added.
Prof Kemp was of a similar opinion, but did not expect a change of course, anticipating the group to stick broadly to its plan of monthly increases of 400,000 barrels per day.
“Of course things can change, but so far they’ve resisted any calls to significantly increase or diverge from the plans they made in back in April 2020,” he said.