Black gold shines! International oil prices soared 20% a month, when will the United States pick up the key to cracking?

Despite the disruption of a new round of the epidemic, international oil prices still opened the new year with a strong trend, and the cold wave and geopolitical factors in the northern hemisphere have become important drivers of the rally. As of Wednesday's close, the WTI crude and Brent crude contracts were trading at $86.96 and $88.74 a barrel, respectively, a nearly seven-year high and a cumulative increase of nearly 20 percent in the past month.

Tamas Varga, senior market analyst at crude oil broker PVM Oil Associates, said in an interview with First Financial Reporter that the resilience of the oil market is incredible, and the bulls now have complete control of the market. The Impact of the Olmikron strain on economic and energy demand is limited, while geopolitical risk premiums are continuing to rise, coupled with cold snaps and low inventory levels in North America, exacerbating concerns about declining supply. At the same time, the discount of each term contract of US oil and cloth oil futures continues to expand, which also reflects the optimism of the market in the short term. However, the United States will not sit idly by on oil prices and may continue to pressure OPEC+ to increase production.

Supply-side surprises are frequent

In the first week of the new year, the international energy market will appear "black swan". Kazakhstan's domestic situation has escalated, important energy-producing areas have been affected, and Libya has "limited" crude oil production by 600,000 barrels per day due to pipeline maintenance and oil field closures.

After the gradual return of normal supply in Kazakhstan and Libya, geopolitical risks continue to brew in the Middle East and other places. Turkey's state pipeline operator Botas said Tuesday that an explosion in the Kirkuk-Ceyhan pipeline system, a key pipeline from Iraq, OPEC's second-largest producer, to Turkey's Ceyhan port, caused a brief disruption in crude supplies.

As the third largest oil producer in OPEC, the UAE called for a meeting of the United Nations Security Council on the 18th to condemn the attacks of the Houthis in Yemen. Yemen's Houthi claimed responsibility for Monday's attack on an oil facility in Abu Dhabi, which caused heavy casualties and led to a fire at the UAE's capital international airport. "The damage to the UAE's oil facilities in Abu Dhabi is not in itself serious, but it raises the issue of more supply disruptions in the region in 2022," said Louise Dickson, senior oil market analyst at Rystad Energy.

The eighth round of talks in Vienna, where the Iranian nuclear agreement resumed, is still underway, and the UAE incident may have cast a shadow over the prospects for negotiations. Dixon pointed out that the increased uncertainty in the Middle East behind the attack may indicate that the nuclear agreement between Iran and the United States will be difficult to break through in the foreseeable future, and that Iranian oil will need to wait longer to return to the market. ING previously predicted that if the United States completely lifted sanctions on Iran, 1.3 million bpd of new production capacity would enter the market worldwide.

In contrast, the tug-of-war between the United States, Europe, NATO and Russia on Ukraine is increasingly attracting market attention. Behind Europe's energy crisis, Russian gas and crude oil exports could be disrupted by potential conflict. The Kremlin has previously clearly warned that any NATO plan to expand eastward will be met with a fierce military response.

Varga told the first financial reporter that compared with the situation in the Middle East, the impact of the Ukrainian issue on the energy market is more intense. Recent fluctuations in Russia's domestic financial markets have reflected the sentiment of concern. Moscow's MOEX index plunged 6.5 percent on Tuesday, a new low since the pandemic, and has fallen nearly 25 percent since the situation escalated at the end of October, while the Russian ruble depreciated nearly 10 percent against the dollar over the same period.

According to previous media reports, the U.S. government held talks with several international energy companies last week about contingency plans in the event of a conflict between Russia and Ukraine that would interrupt gas supplies. Valga analyzed that the recent remarks from all parties have intensified the possibility of escalation of the situation, and energy will become a key risk point. The Nord Stream 2 pipeline has not yet received regulatory approval from German authorities, and the sharp fluctuations in European gas prices under low inventories have exacerbated the risk of recovery in various countries, potentially pushing up demand for crude oil as an alternative. Combined with the expansion of the premium on brent's six-month contract to $1.80, a number of uncertainties have tightened supply-side expectations in the short-term market.

Goldman Sachs: Oil prices target $100 per barrel

At a time when there is a risk of volatility on the supply side of crude oil, the optimistic outlook on the demand side becomes a driving force for further higher oil prices. OPEC this week maintained its 2022 oil demand growth forecast of 4.2 million b/d unchanged, with global consumption expected to reach an all-time high of 100.8 million barrels per day.

The International Energy Agency's IEA noted in its monthly market report released on Wednesday that global energy demand is expected to grow by 3.3 million b/d in 2022, an increase of 200,000 b/d from the previous month. Market liquidity indicators remain strong due to softer restrictions by governments, and recent oil demand is stronger than expected, and energy consumption is expected to return to pre-pandemic levels this year, the report said.

Varga told reporters that although the Olmiqueron strain was once considered a major threat, from the recent research results, it is not expected that this round of the epidemic will cause such a shock as the first half of 2020. Combined with the continuous decline in U.S. crude oil inventories and the dynamic data of energy consumption in major consumer countries such as Europe, global oil demand is more resilient to the impact of the epidemic than expected.

Goldman Sachs raised its oil price forecast in its research report this week, with Brent expected to be $96/b this year and Brent at $105/b in 2023. Damien Courvalin, the bank's head of energy research, noted that strong fundamentals reversed the 2020 oil price crash and the market remained in a surprisingly large deficit as the demand shock to Opichron was much smaller than expected and could be shorter.

The report mentions that the energy substitution of natural gas to oil and the lack of OPEC+ supply will offset the impact of the epidemic. Although the inventory gap will narrow, it will continue until the end of the first quarter. By the summer, OECD oil inventories will reach their lowest levels since 2000, while OPEC+ spare capacity will fall to an all-time low of 1.2 million b/d. With supply growing too slowly to keep up with demand, oil prices are expected to hit $100 in the third to fourth quarters of this year.

However, Varga is wary of whether oil prices can break through and maintain $100. He believes that given the high domestic inflationary pressures, the Biden administration will not be indifferent to the rise in crude oil. If the United States has no intention of making concessions on Iran and Russia, the White House's pressure on OPEC+ to continue to increase production may soon become a reality in the face of a tough midterm election situation.