How high will oil prices climb?

Oil prices rose further on Monday, with global benchmark Brent approaching $80 per barrel, the highest since October 2018, as limited supply feeds a crude boom. Demand in some parts of the world improves quicker than even the most bullish analysts could have imagined.

Brent crude was up 1.73 percent to $79.44 a barrel, having gained three weeks in a row. West Texas Intermediate futures in the United States rose 2.04% to $75.49 a barrel, the highest since July. The latest rise has prompted Goldman Sachs analysts to raise their year-end Brent projection from $80 to $90 per barrel. On a note to investors on Monday, Goldman Sachs stated that the current global oil supply-demand mismatch is more significant than anticipated.

The coronavirus epidemic interrupted worldwide economic activity and devastated demand for crude oil in April 2020, causing oil prices to plummet. However, the lifting of pandemic restrictions this year, company reopenings, and rising vaccination rates have resulted in a recovery in global crude demand. The present oil rise, however, is not only due to the economic rebound.

OPEC +

Last month, Hurricane Ida-related outages severely harmed supplies in the United States, canceling the OPEC+ output boost agreed to by the bloc’s members in July.

The Organization of the Petroleum Exporting Countries and its allies, a grouping known as OPEC+ and led by Russia and Saudi Arabia, had curtailed supplies when the pandemic first hit and prices plunged. After pulling those prices out of the abyss, they agreed to gradually open the taps and allow additional barrels into the global market. OPEC’s World Oil Outlook, released on Tuesday, provides a snapshot of where markets are headed. 

According to the International Energy Agency, the globe utilized 99.7 million barrels per day (bpd) of oil in 2019, before the COVID-19 epidemic crashed fuel consumption. As the global economy improves, the IEA estimates that crude demand will return to pre-pandemic levels sometime next year.

The bulls and the bears

What could go wrong? They did not rule out the possibility of a new coronavirus variety proving immunizations ineffective and, as a result, derailing the economic recovery.

Aside from that, Goldman believes the bull run fueled by the oil supply imbalance is here to stay, at least for the time being.

OPEC+ committing “to an aggressively faster ramp-up in production by year-end would ease (but not derail) our expected shortfall. It would only further postpone the shale rebound,” Goldman analysts added.

They pointed out that the move will confirm the structural nature of the subsequent rise, given the mandatory underinvestment in oil services by 2023. Russia might lower prices by increasing output. Kazakhstan is increasing output following the reopening of one of its refineries. And observers will watch China this week, as its present power problems could lead production to decline.