International oil prices rose for the seventh week in a row last week. As a result, oil prices in New York broke through the $90 and $92 per barrel mark, hitting new highs last seen seven years ago. Boosted by the surge in international oil prices, the A-share oil and gas sector has strengthened. Recently, many stocks in the oil sector have risen above the daily limit, including Zhongman Petroleum, Behnken Energy, and COSL.
Tomorrow, OPEC will release its monthly crude oil production report, and the markets will focus on whether its members can meet output targets and if supply-side tensions will continue. The report's release is expected to add volatility to the crude oil market. Hence, investors should pay close attention to the same.
Why have international oil prices soared recently?
The supply side is the main reason for the surging crude oil prices. First of all, the market is worried that some OPEC member countries will not be able to meet their monthly production targets and lack the spare capacity for future increases in oil output, resulting in shortages on the supply side. Secondly, the recent geopolitical tensions between Russia and Ukraine have exacerbated market concerns about crude oil supplies. Russia significantly influences the global crude oil supply as a major oil producer. Despite being the world’s second-largest oil producer, Russia is not a member of OPEC. Russia has an almost monopoly position in the European natural gas supply. If the two countries go to war, the tensions in the crude oil supply side will skyrocket and lead to a further surge in oil prices. From the perspective of oil inventories, the recent cold weather in the U.S. has led to a decline in crude oil production. Furthermore, U.S. crude oil inventories unexpectedly fell last week, further supporting oil prices.
Looking at the demand side, when the Omicron mutation of the coronavirus swept across the world earlier, international oil prices plummeted. Surprisingly, the mutant virus did not reduce the market demand for crude oil. Still, the supply interruption created by the pandemic caused global oil and gas supplies to become even tighter. In its January monthly report, OPEC predicted that global crude oil demand in 2022 will reach 100.79 million barrels per day, exceeding the 100.10 million barrels demand level in 2019 before the pandemic. The supply shortage is the main culprit behind the current situation in the crude oil market, which continues to support the high oil prices.
Although some analysts have pointed out that the United States is about to start a cycle of interest rate hikes this year, suppressing inflation may simultaneously suppress demand for crude oil. However, OPEC rejected such a view, noting that the rate hikes were unlikely to dampen the outlook for crude oil demand. As a result, the market's strength will continue even as central banks tighten monetary policy, with oil inventories well below their five-year average.
How high will crude oil prices go in the future?
In the face of record-high oil prices, many voices in the market believe that the time for peak oil prices has not arrived, and there is room for higher prices this year. However, as the world's major oil-producing countries gradually increase production, oil prices may slow down if crude oil supply catches up with demand. Still, some OPEC countries have not increased production as earlier planned. With a daily production target of 250,000 barrels, it will take a long time to change the current constrained crude oil supply situation.
As OPEC previously stated, crude oil prices may continue to fluctuate upward in 2022, maintaining a mid-to-high level throughout the year. This has made many global investment firms optimistic about the oil and gas sector. The institutions believe that the uptrend in oil prices will help increase the development momentum for the upstream crude oil extraction industry and the oil service industry. It will also help promote technological innovation and application in the oil extraction industry. Goldman Sachs predicts that oil prices will exceed 100 US dollars in the third quarter, and Morgan Stanley also predicts that oil prices will surpass 100 US dollars.
However, investors should note that the rise in gasoline prices is also one of the main reasons behind the high inflation in the United States. The rising crude oil prices will also affect the popularity of current US President Joe Biden with the mid-term elections approaching. Therefore, the US government is trying its best to contain oil prices through political channels, but they keep climbing. In addition, geopolitical uncertainty also tends to cause international crude oil prices to rise in the face of crucial unknowns in the future. If there are signs of geopolitical resolution or easing, OPEC members and governments could join hands to cool down oil prices. Therefore, international oil prices may undergo a sharp downward adjustment, and they may break below $86 and challenge the $80 mark.
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