The price of oil has skyrocketed to a seven-year high as a result of a tightened supply. But as oil production starts to get back to normal in the US, there is widespread expectation that the price rally of the commodity could nearly be over.
2021 has seen the return of demand for oil causing Brent crude prices to rise at around 75% over the past 12 months. But with a cooling of price rises across all energy markets in recent weeks, there are fears that the market might be oversupplied.
Already the expectation is that Russia and Saudi Arabia may see an oversupply in oil next year, and President Biden is under growing pressure to tap the strategic oil reserve to help lower market prices. What’s clear is that the changes in supply and demand in oil will mean that the commodity’s price rise will peak sooner or later. The question is when?
Increased production expected
Analysts at Goldman Sachs have said that oil prices could stay in the higher regions for some years to come as a result of the continued tight demand. With demand rebounding after the pandemic, it has been predicted that the price for Brent crude could stay in region of $85 per barrel for the foreseeable future. Expectations are that demand for oil will outstrip supply for much of the winter meaning that Brent crude prices could hit $90 per barrel by the end of 2022.
Much will depend on whether the Saudi Arabia-led OPEC will continue to boost output at a steady rate. The White House has already requested that OPEC boosts production, while US output was still 1.5 million barrels per day less than what it was producing two years ago.
There have even been calls for President Biden to issue a call to release oil from the US Strategic Petroleum reserve. This reserve is normally kept aside for emergencies and it is further evidence of just how concerned the White House is with the rising gasoline prices.
Concerns in the energy market
With record price highs for other energy markets such as coal, it’s a testament to how the industry is adapting to calls for a change to cleaner energies. The COP26 climate summit delivered a damning verdict on any investment in fossil fuels and this is just one factor in the skyrocketing energy prices. With no increase in supply among oil drilling companies, the lack of investment has meant that record highs in the price of oil could arrive in 2022 and 2023.
Plus there are concerns about whether the demand for oil will remain sustainable over the winter months. With real fears of another wave of Covid-19 lockdowns in Europe and rising case numbers in China, it is making oil companies hesitant to increase production. While there could be a surplus in oil as soon as December, with a backdrop of inflationary fears and the return of the pandemic, it’s hard to see the market stabilizing anytime soon.