MUMBAI: There is a growing consensus in markets that global oil prices could reach the triple-digit mark by next year on the back of booming global demand as more economies open up after the ongoing Covid vaccinations.
Noted commodity strategist Francisco Blanch of BofA Securities last month made a case for oil to reach $100 per barrel, as demand booms and supply fails to catch up. In the options market, traders and hedge funds have been piling up bets for $100 a barrel oil price by the end of 2022.
Global oil prices have rallied significantly over the past nine months, moving from less than $30 a barrel to closer to $75 on the back of re-opening of economies like the US, the UK and China.
Oil prices at $100 could be bad news for the Indian economy and its fledgling recovery. Most investors and economists will shudder with the memories of the early days of the past decade, when oil prices had moved to triple digits and thrown the Indian economy into a tailspin, culminating in the humiliation of being tagged the ‘Fragile Five’ of the global economy.
Hitesh Jain of YES Securities says a repeat of the oil market super-cycle of the kind seen in 2004-2014 is unlikely. In a note, Jain argued that investors should take the chorus of ‘$100 oil’ with a ‘grain of salt’.
“Brent value should peak out around $80 a barrel as Opec supply will inevitably move higher, given the lure of higher price realisation and record high spare capacity,” Jain said.
Jain’s first argument rests primarily on the Organization of Petroleum Exporting Countries (Opec) members and non-members eventually raising output, given the new schism that arose in the previous meeting.
UAE’s demand for higher export quotas threatens to disturb the harmony of the cartel. The cartel’s de-facto leader, Saudi Arabia, fears that conceding to UAE’s demand could open the door for similar demand and pushback against its proposal for extending output cuts till the end of 2022.
“We do not see Opec resisting the opportunity to raise output amid lucrative prices, even if it means losing out on one of its oldest members,” Jain said.
The second factor that may support Jain’s thesis is the fact that oil barrels from Iran could flood the market soon, if negotiations with the US over the nuclear deal work out. While the negotiations on lifting of the existing sanctions have been rocky, there is a general consensus that the deal will go through given the push from the Biden administration.
End of the sanctions on Iran can immediately bring an additional 0.5 ‐0.7 million barrels per day of Iranian crude into global supply. Furthermore, Iranians will instantly liquidate as much of the 120 million barrels of crude and condensates in its storage, which the market used to handle prior to the sanctions, YES Securities said.
Thirdly, Jain’s confidence on the current demand forecasts for oil demand working out to perfection is low. He is of the view that global demand will taper in 2022, given the uncertainties around Covid-19 in much of the developing world, and the likely slowdown in global growth from the 6.1 per cent run-rate projected for 2021.
“…we think oil at $100/bbl is a difficult proposition to sell,” Jain asserted.