Analysis: Why oil prices could rise even higher

Russian troops were preparing to invade yet another former Soviet republic. Oil prices were rising. Western countries begged Saudi Arabia to turn on the faucets.

That was in 2008, just before Vladimir Putin sent Russian tanks across the border into Georgia. The price of oil in the United States ended up reaching an all-time high of almost US$ 150 (R$ 758.59) a barrel.

Trading around US$116 (R$586.64) a barrel this Monday (7), US prices are still outside that peak, while the international benchmark Brent reached a peak of US$139 (R$702). .96) before falling to US$ 120 (R$ 606.87). But the echoes of 2008 — from the war to calls from Western authorities in Riyadh — are getting harder and harder to ignore.

China’s relentless thirst for energy underpinned the recovery 14 years ago. This time, even developed economies are getting into a post-pandemic fossil fuel binge.

Remember when the pandemic would accelerate peak oil demand? US consumption has hit a new record in recent weeks. Global consumption will do the same this year, says the International Energy Agency.

Supplies are not keeping up — a legacy of lower global upstream investment in recent years, now exacerbated by deep cuts in capital spending made across the U.S. shale sector in the wake of the pandemic-induced oil crisis. Some OPEC producers — historically the suppliers of last resort — are struggling to meet their production quotas.

A market convinced a few years ago that the US shale revolution ushered in an era of endless abundance is now worried about scarcity.

The possibility that oil shipments from Russia — which supply about 5% of global oil demand and 10% of the refined products export market — will be sanctioned is deepening those fears.

Even without an embargo, new financial sanctions and the exodus of Western companies and technology could do lasting damage to Russian oil production capacity.

That leaves prices for the product, which have already climbed 25% in two weeks, poised to jump higher, optimistic analysts say.

“Ultimately, what we’re seeing is a reassessment of the price of oil,” says Christyan Malek, managing director at JPMorgan. His bank, which two years ago predicted a new commodity supercycle, says crude could reach US$150 (R$758.59) by 2023. But the crisis in Russia could still bring a “massive surplus”, he says. Malek.

US oil prices nearly tripled in three months during the 1973 Arab oil embargo, and doubled again in two months after the Iranian Revolution in 1979, when the country’s production collapsed. Other suppliers intervened, minimizing the overall deficit. In 1979, it was fear of scarcity, not scarcity itself, that caused the boom.

There are still reasons to be pessimistic now. The speculative fervor has subsided a little, says Pierre Lacaze, founder of brokerage LCM Commodities.

So-called “negative gamma” — options traders covering their short positions as prices quickly rise — was a significant factor as oil prices rose from $70 (BRL 354.01) to $100 (BRL) $505.73) a barrel. But there are enough “not really significant” short positions that would indicate rising prices on the basis of “negative gamma” alone, says Lacaze. The market is responding to geopolitics and fundamentals.

And those forces could still turn against oil prices. The consequences of the war in Ukraine could harm the global economy. A diplomatic deal with Iran would allow more of the country’s oil on the market.

Analysts at Citi, among the few on Wall Street who are betting on a drop in crude, say rising global production, including from Iran, will drive prices down this year “as the focus shifts from geopolitical risk to sustained oversupply.” and peak oil demand”.

The US and other countries have also shown that they will release strategic oil stockpiles to try to tame prices, points out Amy Myers Jaffe, a professor at the Fletcher School at Tufts University.

However, sustained losses of Russian supply would be difficult to repair. Even the prolific US shale patch would need years to do its part.

Disruption could push oil prices above $200 a barrel, says Rob West, head of research firm Thunder Said Energy.

Over time, a price shock would offer one more compelling reason to stop burning the fossil fuels that cause climate change. The shift to electric vehicles, which is already running at a rapid pace, would accelerate. High prices would cure high prices.

But nobody knows what that demand destruction threshold is. Unlike the July 2008 price spike, when the mother of all credit crunches was brewing in the background, today’s economic outlook is also bullish. Many consumers are flush with post-pandemic stimulus money and eager to burn off energy.

“We continue to underestimate the price of oil that the world can handle,” says Malek. If this is your first oil shock and you’re already shuddering at the gas pump, brace yourself. The market thinks you can probably handle higher prices.

Translated by Luiz Roberto M. Gonçalves