The combination of existing imbalances and the recent expected disruption is looking to tighten the market further, steadily pushing oil prices towards $100 per barrel early in the year. The global oil prices hit 7-year highs last week as Brent crude futures briefly touched US$89 per barrel. In contrast, US West Texas Intermediate (WTI) crude futures hovered around US$85 per barrel on the expectation of supply disruption following a series of fatal attacks in the Middle East and geopolitical tension in Eastern Europe. The global oil market started with demand-supply imbalances due to outages and maintenance repairs across many oil-producing nations.
The market remains under-supplied as OPEC plus, and the US shale producers cannot match supply with the speedy recovery in demand. With oil prices rising by 13% YTD, several factors could trigger the $100 per barrel forecast in the short term.
Middle East Tension
On Monday, January 17, 2022, a Yemen-Iran Houthi militia launched a fatal attack on the United Arab Emirates (UAE) following the interception of its earlier drones targeted toward Saudi Arabia but seized by a Saudi-led coalition. This came barely two weeks after the Houthi group confiscated a UAE-flagged vessel on the Red Sea. Analysts considered the attacks a threat to UAE to desist from further alignment with the Saudi-led coalition.
The recent Houthi attack on UAE killed at least three people, injured many, hit a fuel depot, and caused a fire outbreak near the Abu Dhabi International Airport. In what seems like a counterattack, just a day after the incidence, the Saudi-led coalition claimed some airstrikes on Yemen’s capital city -Sanaa, that killed at least 20 people. According to Saudi media, the Saudi coalition has begun airstrikes against the camps and strongholds of the Houthi Group in Sanaa. What follows is a series of attacks to date in the region and the possibility of further escalation.
Overall, the oil market may bear the brunt as the Middle East accounts for a significant global oil supply. Saudi Arabia and UAE are the first and third-largest oil producers of OPEC. By implication, the tensions (in terms of expected disruptions) have impacted oil prices for two straight weeks. There is the likelihood of actual supply disruption in case of further escalation, fueling higher oil prices.
Eastern Europe Tension
Russia has been stepping up its preparedness to invade Ukraine for the past few weeks. With over 100,000 troops massed along the Ukrainian border, investors are bullish on oil prices expecting the geopolitical risk between Russia and Ukraine to disrupt supply in the near term significantly.
Last week diplomacy between the US Secretary of State, Antony Blinken, and its Russian counterpart, Sergei Lavrov, yielded no outcome as the Kremlin insisted on its demands which the US said are impossible to meet. Essentially, Kremlin demands an end to NATO expansion to new members, especially countries under its threat, such as Ukraine. UK foreign office on Saturday also stated that the Russian Government intends to “install a pro-Russian leader in Kyiv as it considers whether to invade and occupy Ukraine”.
With considerable fear of oil supply disruption already on the horizon, the eventual invasion of Ukraine by Russia will generate harsh economic sanctions from the US and the European Union. This is expected to have dire consequences on the oil market, given that Russia is the largest non-OPEC producer. Additionally, Russia accounts for 35% of Europe’s natural gas supply, with some pipelines passing through Ukraine, including the highly controversial Nord Stream 2. Europe’s energy market is likely to bear the brunt of the tension if it degenerates into total conflict.