Oil time high: Do analysts think crude will hit $200 a barrel? – Capital.com

Posted: March 26, 2022 at 6:32 am

Analysts discuss whether the price of oil could hit $200 a barrel - Photo: Shutterstock.

Russia claims that oil could hit $300 a barrel if its crude is boycotted by international markets, warning that European Union (EU) sanctions on Russian oil could prompt it to close the Nord Stream 1 gas pipeline to Europe.

Russian Deputy Prime Minister, Alexander Novak, said in a state television address on Monday, It is absolutely clear that a rejection of Russian oil would lead to catastrophic consequences for the global market.

The surge in prices would be unpredictable. It would be $300 per barrel, if not more.

While a potential price surge of oil reaching $300 sounds a little far-fetched, given the worlds dependence on Moscows commodities, is it improbable?

Capital.com asked several energy analysts for their thoughts and whether oil could hit $130, $150, or even $200-plus and what impact a further surge in prices could have on the global markets.

Oil prices jumped more than 3% on Monday, with West Texas Intermediate (WTI) inching closer to resistance at $110 a barrel.

Victoria Scholar, head of investment at Interactive Investor, said in a note sent to Capital.com on Monday that March has seen the sharpest oil market volatility since the height of the Covid-19 pandemic in 2020, when the commodity became technically worthless.

Mondays sharp rally is being driven by ongoing constrained supply from OPEC+, a stalemate in peace talks between Russia and Ukraine, a potential Russian oil embargo from the European Union and a Houthi attack on a Saudi energy terminal, all exacerbating an existing imbalance between supply and demand in the market, she said.

Evridiki Dimitriadou, an analyst at S&P Global Commodity Insights, told Capital.com the front month ICE Brent crude oil futures contract price showed a head-and-shoulders pattern over the first week of March, which is often indicates that prices have peaked at a multi-year high level in this case.

So far, the short and long-term moving averages dont provide a clear bullish or bearish signal if we consider this technical indicator as well, however the data is quite noisy, mainly due to the volatility caused by the developments associated with the Russia-Ukraine military conflict. Crude oil prices are rising again today as some European Union countries could consider joining the US and UK in banning Russian crude oil.

If the EU actually makes such a move, the levels reached earlier in March are very possible, it is harder to estimate how much further they can move up, however, as it would depend on Europes alternatives to the banned oil volumes and the specific terms of the ban, Dimitriadou said.

According to Trading Economics data, crude oil reached an all-time high of $147.27 in July 2008 and as reported by Capital.com the escalating conflict between Russia and Ukraine has already pushed oil prices to a 14-year high.

INGs head of commodities strategy, Warren Patterson, discussed the significance of western dependency on Russia in a podcast last week, as the country currently supplies the EU with more than 25% of its oil and up to 40% of its gas.

Russia is a key oil supplier to global markets. It exports somewhere in the region of seven and a half million barrels a day of crude oil and refined products, which is about 12% of global trade. This amount of oil is not something that can be offset by other producers any time soon, he said.

Osama Rizvi, an energy analyst at Primary Vision, told Capital.com oil could reach $200 per barrel.

Right now, the oil markets have almost become untraceable as the sentiment keeps shifting at a dizzying speed, he said.

It is interesting to note that there havent been any new additions in terms of variables affecting the price of oil. Concerns regarding supply, falling spare capacity continued to keep the prices higher. After that, the geopolitical flashpoint in the form of the Russia-Ukrainian crisis provided the impetus to take the prices all the way to $100s.

Rizvi also noted how prices approached their 2008 highs on 7 March, touching $139 and falling after that. He said the price went up on the possibility of the EU sanctioning Russias oil and gas, and fell because the EU realised it could not be done.

Why have prices rallied again? The EU is once again considering cutting off Russian oil and gas. Can they do it? Practically speaking, yes. Will they? I don't think so, Rizvi added.

Rizvi also said he believes prices will fall. However, if they go ahead with that, with an impending three (million barrels per day) shortfall in terms of Russian production expected, this can take prices to $200, he said.

Rizvi further noted that if the Joint Comprehensive Plan Of Action the Iran nuclear deal is successfully renegotiated, and the EU delays its decision to ban energy imports from Russia, along with an expected de-escalation of the conflict, it would result in a selloff in prices with the possibility of $50 Brent once again.

Brendan Long, director of institutional research at investment advice company WH Ireland, was also of the view that oil prices could hit $200 a barrel, or more.

In my opinion, the oil market is in disequilibrium and will be in disequilibrium for the foreseeable future. By that I mean the price of oil will exceed the marginal cost of production.

For perspective, I believe that the oil market was headed for an undersupply crisis even before the war in Ukraine, Long told Capital.com on Monday.

He further highlighted that oil prices could conceivably spike above $200 per barrel, depending on how the undersupply crisis plays out.

The situation is analogous in some respects to the 1979 oil crisis. One of the big changes from the late '70s is that today the price of oil is determined in financial markets. During the 1979-81 period panic led to hoarding, which further increased the price of oil. Today that could be exacerbated by the financial markets aspect of commodity markets, Long said.

He also noted setting aside the intricacies of market mechanics the oil market is exceptionally tight and spare production capacity is limited.

Due to the perceived malignancy of oil and a resulting under investment in the sector, we are, in my opinion, facing an acute energy crisis of our own making, Long concluded.

Ajay Parmar, a senior oil market analyst at ICIS also shared his views with Capital.com on how high oil prices might go.

Crude prices of over $150/bbl are certainly possible, but it would necessitate a confluence of a number of bullish factors to reach this level. Namely, it would require the EU to fully sanction the 2.5 million barrels per day of crude imports into Europe, whilst demand in China would also need to recover promptly from the rising Covid cases it is currently seeing, he said.

He noted that, in this case, the ICIS high case forecast sees Brent oil prices reaching above $150/bbl in the summer.

Needless to say, oil prices at these levels would inevitably lead to some demand destruction, he said.

Parmar also noted that a more likely scenario is for a reduction in near term global oil demand due to lockdowns in China, which he said will provide the market with some reprieve from the high prices weve recently seen.

Looking into the summer, we assume the Russia/Ukraine conflict continues but is no longer at the forefront of the zeitgeist, whilst China is expected to recover from its lockdowns and overall global oil demand will be strong due to seasonal trends. ICIS forecasts a base case crude price of over $120/bbl in the summer, he said.

Giles Coghlan, chief analyst at HYCM also shared his thoughts with Capital.com and said as long as the geopolitical risk between Russia and Ukraine remains, oil prices will be susceptible to spiking higher.

Right now, $130 is the first near-term target, as this was the previous spike high area. However, thereafter investors can expect $150 to be the next target, in line with July 2008 highs selling was strong at this level, and growth worries should keep oil pressured in the medium term, he said.

Coghlan added the higher oil prices soar, the more it will stoke inflation concerns. In turn, this will mean that central banks many of which are already hiking their interest rates will face a much greater risk at slowing their economies and hindering consumer confidence.

He added that it means high oil prices will ultimately play into recessionary concerns, as growth prospects take a hit.

As the old saying goes in the commodity market, the best cure for high prices is high prices. When oil prices surge higher, producers tend to respond by producing more in the face of diminished consumer demand it is a self-corrective mechanism, which eventually results in a fall in prices, Coghlan said.

Tamas Varga, an analyst at PVM Oil Associates, told Capital.com he believes only an Iranian nuclear deal could save this market from going up to $130 again, given the war in Ukraine is protracted and as sanctions against Russia bite.

We could see $150 in case Europe imposes an energy ban on Russian sales, just like the US did. Bidens visit to Europe this week will provide an answer to that question. In case Russia retaliates by turning off the natural gas spigots, even higher prices cannot be excluded, he said.

For the long term, he said we need to keep in mind that high inflation and interest rate increases, that are partly the product of the current oil price strength, are sowing the seeds of a considerable demand destruction.

Marc Chandler, managing director at Bannockburn Global Forex, thinks it would.

I think that before oil were to get to those higher levels, OPEC+ would step up. Also, the higher oil prices will destroy demand. In my work, I have been talking about how oil prices have doubled before the last three US recessions.

There are a couple of other sources of oil: Venezuela, where there has been some movement between the US and the sanctioned government. The same with Iran. Also, the tapping of strategic reserves has been quite minor. It could be increased, too, he told Capital.com.

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Oil time high: Do analysts think crude will hit $200 a barrel? - Capital.com

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