International oil prices hit a seven-year high

Source: Economic Reference Daily Qin Tianhong

International oil prices rose to a seven-year high on January 18, due to factors such as geopolitical tensions threatening crude oil supply. Analysts pointed out that in the face of the uncertainty of the epidemic situation and the easing of geopolitical risks, the future trend of oil prices will continue to fluctuate.

International oil prices hit a seven-year high

As the attack on the UAE triggered market concerns about the escalation of geopolitical risks in the Middle East, international crude oil futures prices rose significantly at the close of the 18th and hit the highest closing price since 2014. As of the close of the day, light crude futures for February 2022 delivery on the New York Mercantile Exchange rose $1.61 to close at $85.43 a barrel, or 1.92 percent. Brent crude futures for March 2022 delivery in London rose $1.45 to close at $87.51 a barrel, or 1.68 percent.

A tank truck explosion and an airport construction site fire occurred in Abu Dhabi, the capital of the United Arab Emirates, on the 17th. Police said the two incidents were suspected to be the result of drone strikes. Yemen's Houthi armed forces claimed to have hit targets in the "hinterland" of the UAE on the same day. According to Turkey's Anadolu News Agency, the oil pipeline connecting Kirkuk in Iraq and the port of Ceyhan in Turkey exploded in the city of Kahraman Marash in southeast Turkey on the evening of the 18th, causing a temporary interruption in crude oil exports. To avoid greater losses, Turkey's Bottas Oil Pipeline was forced to temporarily close the pipeline.

The UAE National Oil Company said its operations were not affected by the fire and launched a business continuity program to ensure a reliable and uninterrupted supply of products to local and international customers.

Edward Moya, a senior market analyst at online foreign exchange trading platform Oanda, said the Houthi drone attack on the UAE had reignited concerns about potential crude oil supply disruptions in the region. It appears that some countries and regions, such as the United Arab Emirates, Libya, Kazakhstan, Canada and North Dakota in the United States, could interrupt crude oil production at any time due to geopolitical tensions or cold weather. He noted that the failure of the Organization of the Petroleum Exporting Countries (OPEC) and its allies to meet their production quotas has increased the momentum of oil prices.

Tolbion Thorneyon Saltvit, principal analyst for the Middle East and North Africa region at Verisk Maplecroft, a global risk and strategy consultancy, said Gulf states will remain vulnerable to attack unless GCC countries find ways to defuse regional tensions or deter hostility from states or non-state actors in the region. Saltwitt said damage to tanker trucks and storage infrastructure would worry oil market players, while progress in negotiations between the United States and Iran on the nuclear issue is also being watched. As the time for negotiations has passed, the risk of a deterioration of the security environment in the region has increased. In the coming weeks, the risk premium to oil prices in the Middle East is expected to attract more attention.

Resta Energy analyst Louise Dixon said that while the damage to UAE oil facilities was modest, it raised questions about whether there would be more supply disruptions in the region in 2022. The attack raised geopolitical risks in the Middle East and suggested that negotiations on the Iranian nuclear issue may not continue in the foreseeable future, and Iranian crude oil remains inaccessible to the market, boosting demand for similar oils in other regions.

Many institutions are optimistic about the trend of oil prices

For the whole of 2021, international oil prices rose by about 50%. Since the beginning of 2022, oil prices have continued to rise due to the gap between oil supply and demand. In less than three weeks, oil prices have risen by more than 10 percent. Among them, Brent crude oil rose by about 11%, and light crude oil rose by more than 12%. At present, a number of financial institutions predict that oil prices will continue to rise in the future.

High demand and sluggish supply remain the main reasons for the recent rise in oil prices. In late November and early December 2021, when the mutated new coronavirus Olmikharong strain first struck, international oil prices fell sharply. But then news that the Omiljun strain was less symptomatic and the vaccine was still protective was revived, and the entire oil industry, from diesel to jet fuel, signaled optimism.

Helima Croft, head of commodity strategy at the Royal Bank of Canada, believes that the current rise in international oil prices is very dangerous, and even if oil supply is not disturbed by new disturbances, oil prices are likely to rise to more than $100 per barrel. The last time international oil prices broke through $100 a barrel was in the summer of 2014.

Taylor Ritchie, co-editor of the 7-Point Market Report, a U.S. market research journal, said that the fading concerns about the Amicoreon strain and the downward revision of the global supply outlook for 2022 have narrowed the oil oversupply forecast this year. This means that in the coming quarters, below-average oil inventories will not recover anytime soon.

Goldman Sachs analysts said natural gas shortages in Europe and Asia have also pushed up oil demand, with oil demand increasing by 500,000 bpd in December 2021 and a further increase of 300,000 bpd in January and February this year, with oil demand reaching an all-time high this year and next. Damian Kuwalin, head of energy research at Goldman Sachs, said it was entirely possible for international oil prices to rise to $100 or even $110 a barrel. Kuwalin believes there are two possible paths for oil prices to rise above $100 a barrel. First, the relationship between oil supply and demand continues to be tense. Second, high global inflation persists and eventually spreads to oil production, raising the cost of oil.

Rising energy prices, including oil, are also continuing to push up global inflation. According to data released by the U.S. Bureau of Labor Statistics, the U.S. inflation rate has reached 7.0% in December 2021, with energy prices rising 29.3% year-on-year, the largest increase among all major goods and services categories.

The future volatility trend remains the same

Analysts pointed out that although the market is generally cautiously optimistic about short-term oil prices, it is expected that the level of oil price volatility will remain high in the short term, taking into account the changes in the spread of the Omicron strain around the world, the impact on crude oil demand, and the changes in the production plans of oil-producing countries such as OPEC.

Reuters pointed out that tensions in the Persian Gulf may add another "fire" to the rise in oil prices in the coming period, because the region accounts for about 40% of the world's total seaborne oil. In addition, tensions between Ukraine and OPEC and non-OPEC producers, as well as Russia, also exacerbate geopolitical risks, and any small fluctuation will touch market-sensitive nerves.

On the other hand, if geopolitical risks are mitigated, the risk premium in oil prices is bound to be significantly reduced, and oil prices are bound to pull back. There is a clear divergence in the market over the medium-term direction of oil prices. Compared with Goldman Sachs' optimistic expectations, the U.S. Energy Information Administration report expects the average price of Brent crude oil futures to fall back to $68 per barrel in 2023, and Citigroup also expects Brent oil prices to drop to $54 per barrel by the end of 2023.

U.S. National Security Council spokeswoman Emily Horn said in a statement on the 18th that the White House plans to continue to monitor energy prices in the context of global economic growth, and if necessary, will hold consultations with OPEC and non-OPEC oil producing countries. "We will continue to work with oil-producing and consuming countries, these measures have had a real impact on prices, and we still have the tools to address energy prices," Horn said. Horn said the United States is committed to working with other countries to lower oil prices and, ultimately, gasoline prices.

In November 2021, the United States, in coordination with India, Japan, South Korea and other countries, announced the release of 50 million barrels of oil from the Strategic Petroleum Reserve. Horn said the U.S. government has put 18 million barrels of oil in and expects to reach the market in February and March.