Oil Prices Climb on Fears of Supply Tightness

Brent Crude has been hovering between $87/bbl and $88/bbl in the last couple of days after scaling above the $88/bbl mark. Clearly, there is a lot of bullishness in oil and that is clearly coming from tight oil supplies. The latest update is that there is some geopolitical trouble in the Middle East and that is also fuelling the rise in oil prices.

Currently, there is tensions in Eastern Europe and in the Middle East. The Abu Dhabi government confirmed that they had intercepted 2 ballistic missiles fired by Houthi rebels into UAE territory. Houthi Rebels have being long fighting a proxy war against Saudi Arabia and UAE for interfering in their internal affairs and cutting off supplies to Yemen.

Then there is the worsening situation in Eastern Europe. Russia has already been in Ukraine for some time and the Western world is worried that Russia may use this opportunity and try to browbeat Ukraine into submission. Ukraine is not just the bread bowl of the region but it is also rich in oil, somewhat like Kazakhstan. That is also adding to oil prices.

Normally, oil has been a demand supply game. Once the Omicron virus was announced in later November, the expectation was that the price of oil would fall on weak demand. However, what happened was exactly the opposite. Oil prices have actually rallied since the start of December by more than 27% and that is despite the overhang of Omicron.

Late on Friday, the price of Brent Crude had crossed $88/bbl and WTI crude was also above $86/bbl. Prices have tapered after that but the underlying supply disruption tensions are still there. Troubles in the Middle East means problems in the Straits of Hormuz and that moves nearly a third of oil out of that area.

Most investors remained bullish about the prospects of oil due to geopolitical risk between Russian and Ukraine as well as in the Middle East. Meanwhile, OPEC continued to fall short of its output targets citing weak demand. OPEC is clearly wanting to keep the supply of oil below demand so that prices can be supported at remunerative levels.

On the inventory front, the US petroleum inventories have continued to slide over the last month. Meanwhile, energy firms cut oil rigs this week for the first time in 13 weeks. Analysts have expressed concerns that an exceptionally cold winter would most likely boost heating demand over the next few weeks. With demand so strong, one can expect further pressure on oil prices. Goldman is already pencilling $100/bbl for crude by end of 2022.

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