The volatility in international crude oil market continues unabated. Every week is an event, sending markets into frenzy. The latest to the list is the rising tensions between Saudi Arabia and Yemeni rebels, which led to one of Aramco’s storage facilities shot at and on fire. The fire may well have been put out, but the smoke is very much there to counter any hopes of cooling off anytime soon.
The likes of JP Morgan have of late raised the crude oil price forecast to $200/bbl in a bull scenario – and have found endorsements from the world’s top energy commodity traders. Outlandish as it may sound; even the most conservative of observers have kept the forecast north of $130/bbl for most of 2022. Even if the extreme bullish scenario does not play out, there are enough imbalances in the oil market to keep the bulls on the toes.
Future of the all-important Opec+ alliance has been in question, as the West increasingly distances itself from Russian crude in the wake of fresh sanctions. The Opec+ group is set to meet this Thursday to chalk out a fresh strategy. There have been increasing calls of pumping more oil from the USA, to which the alliance has so far paid no heed to.
The UAE, another key member of the alliance, had earlier given confusing signals with regards to the future of Opec+ and a possible change in production strategy. Recall that the UAE has announced plans to ramp up its capacity by 5 million barrels. At the same time, UAE has continued to back Opec+, reaffirming that collective decisions will be taken, and that politics should be kept out of oil. However far from reality this may sound, but Opec+ has so far resisted the temptation to incorporate the ever-rising risk premium of the geopolitical tensions, and a probable permanent closure of Russian crude to the West.
The UAE and Saudi Arabia have so far stuck to the planned phased production increase, but have at times struggled to keep pace. Industry observers claim that the Kingdom may well be running out of spare capacity faster than expected, and there is not much left to pump more to entertain USA’s demands. On the other hand, USA’s shale producers are struggling themselves to ramp up production and may need another 15-20 percent rise for a meaningful production increase feasible.
The slump in demand from China, due to fresh imposition of restrictions as Covid surges, has offered some respite, but that could be short-lived. The potential loss of Russian oil barrels is all set to outweigh the temporary slump in demand from China. All eyes are once again set on the Opec+ meeting on Thursday.
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