JPMorgan’s chief executive Jamie Dimon thinks oil prices could surge to $175 a barrel later this year. Jeremy Weir, the head of commodity trader Trafigura, says oil could go “parabolic”.
Energy Aspects, a consultancy with clients stretching from hedge funds to state energy companies, says we are facing “perhaps the most bullish oil market there ever has been”. Goldman Sachs thinks oil prices will “average” $140 a barrel in the third quarter of this year.
It is tempting to dismiss this mass outbreak of bullishness as book-talking by banks and traders positioned for a short-term rise in crude, which has already reached $120 a barrel.
Those with long memories recall the surge in oil to $147 a barrel on the eve of the financial crisis, when Goldman was among the chief cheerleaders for a rally that quickly reversed as the economy went south. Oil was at $40 a barrel by Christmas 2008, yet some of the bonuses earned by Wall Street energy traders that year went down in market lore.
But while a healthy dash of scepticism is usually warranted with price forecasts, you only need to scratch the surface of the oil market to see that these bullish calls are, this time, well-founded.
The energy crisis, which started with Russia squeezing natural gas supplies to Europe before spreading across the commodity complex after the invasion of Ukraine, is far from over. It is likely to get worse before it gets better, with grave ramifications for a world economy already riddled with inflation.
The key issue is a simple one: there is barely enough oil to go round. And with Russia’s sanctions-hit oil output facing an increasingly difficult route to market there are legitimate fears supply could fall much further.
The EU has just banned seaborne cargoes of Russian oil, forcing Russia to ship its crude ever further distances to buyers willing to turn a blind eye to its actions in Ukraine. India and China have snapped up heavily discounted cargoes after many buyers in Europe self-sanctioned.
But as the volumes of displaced Russian oil rise, there are questions over the ability and willingness of refiners in Asia to keep absorbing them.
The big challenge is a looming ban on insurance in the EU and UK for ships carrying Russian oil. It would effectively shut Russia out of mainstream tanker markets, leaving them with vastly reduced options for shipping their oil. Oil tankers do not just need to insure expensive cargoes but against liabilities such as Exxon Valdez-style spills with multibillion-dollar clean-up costs.
Rory Johnston, a commodity strategist, argues that most major ports simply will not accept tankers without protection and indemnity insurance — a market the UK and EU dominate — and conservatively estimates that Russian production declines will double to about 20 per cent from pre-invasion levels — or 2mn barrels a day — by the end of the year.
Russian output could fall much further, with the International Energy Agency predicting a decline of 3mn b/d — the equivalent of losing almost all Kuwait’s production.
This potential shortfall will not be easy to replace. Western governments have already tapped into strategic reserves, releasing about 1mn b/d since the invasion. But that has only tempered the price rise, not reversed it, and cannot continue indefinitely.
The only countries with significant spare production capacity are Saudi Arabia and the United Arab Emirates, but their ability to pump is not unlimited. Saudi Arabia’s production is approaching 11mn b/d after agreeing to slightly accelerate output increases. But to add another 1mn b/d would push their output towards uncharted territory, straining their oilfields if they need to hold production there for more than a few months.
Other Opec members are struggling to boost production even back to pre-pandemic levels after years of mismanagement and under-investment. A potential US nuclear deal with Iran that could free more of their barrels is stuttering.
Spiralling food prices risk unrest in many oil-producing countries, further threatening supplies.
Western oil majors remain hesitant to invest. Even if they ignored pressure to go green, large developments outside the US shale patch take years to come on stream.
If supply is deeply troubled, that leaves demand to balance the market. But governments have made short-sighted cuts to fuel taxes that support consumption, while people frustrated by two years of Covid-19 disruption have been willing to pay up at the pump.
China is reopening. People are flying again. Demand is going in the wrong direction.
All these factors point to rising oil prices until a level is reached that reduces consumption, probably by triggering an economic slowdown large enough to curtail demand. In other words, a recession for many economies.
Policymakers could encourage conservation, from lowering speed limits to reinstating taxes. But the evidence to date suggests they are happier stumbling into disaster than upsetting motorists. They must hope that when oil gets cheaper again, voters will still have a job to drive to.
david.sheppard@ft.com
