Oil prices are showing no signs of easing as the bull market remains well supported by fundamentals. Brent crude has rallied for four consecutive weeks, surging by more than 11% since the beginning of the year and up 32% from the lows of early December 2021 when the highly transmissible Omicron coronavirus variant began spreading across the globe.
Crude futures touched a new three-year high at $86.71 in Asia this morning as traders closely monitor whether the bull run will continue. This is the level when Brent peaked in October last year and in October 2018 after which prices dropped sharply by 42% in the following three months. An upside breakout from here leaves us with no near-term major resistance level, suggesting a potential test of $90 and the more psychological resistance level of $100. What seemed impossible a few months ago is now highly likely to occur.
Several factors have contributed to the latest rally, including outages in Libya, Nigeria, Angola, Ecuador, and Canada most recently due to the extreme cold weather. Refiners may have also reduced purchases in December when the Omicron variant began to spread, but they were caught by a surprise as demand wasn’t severely affected, and now they are trying to cover the gap. So, it is both sides of the supply/demand equation that is contributing to the rally and previous expectations of supply outpacing demand in the first quarter isn’t materialising.
Geopolitical risk premium may also increase if the conflict between Russia and Ukraine escalates. Further disruptions of Russia’s gas supplies to Europe will not only lead to higher gas prices but also crude oil.
Only OPEC members and their allies can bring prices down at this stage by pumping more crude from the big players. However, there doesn’t seem to be a willingness to do this. Instead, OPEC+ are likely to continue pursuing their strategy of gradually relaxing output cuts as they enjoy the current high price tag.
While current prices may not be sustained at current or higher levels in the long run, we are still likely to see a further rally in the near term as tailwinds remain intact.
