Commodity analysts at Dutch multinational banking and financial services company ING Bank have said the oil price rally still has room to run, and have forecast that Brent crude will break above $100 per barrel in the near-term assuming OPEC+ doesn't budge with its supply cuts.
Like many other oil experts, ING says the markets have tightened considerably due to production cuts by Saudi Arabia and Russia, and see the current deficit of more than 2MMbbls/d persisting through the fourth quarter of the current year.
Their latest thesis buttresses their earlier bullish forecast they had issued at the beginning of the year wherein they predicted tightening in the market from the second quarter through to the end of the year.
ING has pointed out that action in the oil futures markets further cements the bullish case, with the prompt ICE Brent timespread widening to a backwardation of more than $1.40/bbl in the current week, up from around $0.60/bb at the start of the month.
At the same time, the spread between the December 2023 and December 2024 contracts has now hit $10 per barrel. This deepening backwardation in the forward curve suggests traders are bullish that oil prices are headed even higher.
But there is bound to be a fair amount of near-term profit-taking ahead of us, with ING noting that oil prices topping $100 are not sustainable.
The Dutch bank warns that oil prices are unlikely to remain above $100 per barrel for an extended period of time and have predicted that Brent prices will only average $92 per barrel in the fourth quarter, slightly lower than current Brent price at $94.26.
ING Bank is not the only energy agency that sees oil crossing the psychologically important $100 per barrel level.
StanChart has forecast Brent prices in Q4 2023 to average USD 93/barrel (bbl) and hit an intra-Q4 high above USD 100/bbl. Indeed, they are confident that oil prices are more likely than not to surprise to the upside. Related: Saudi’s ADES Prices IPO At Over $4 Billion Valuation
Where analysts diverge is with respect to how long $100 oil prices can last. In turn, that means they disagree on one very important point: Saudi motivation for output cuts.
ING says OPEC is likely to face increasing political pressure as fuel prices continue to rise. The Dutch bank believes that historically the group’s strategy has been to stabilize the markets and not target certain price levels.
Thus, predicting the future of oil prices is less a game about fundamentals than it is about determining whether the Saudis are cutting output to jack up prices to balance their 2023 budget, or whether they truly see a need to stabilize the market.
While many analysts see tightening supply and excess demand running into the future, the Saudis maintain that the “jury” is still deliberating on this and that tight market situation is not a given. Riyadh maintains that Chinese oil demand remains uncertain, as does Europe’s economy and global interest rate hikes. This latter, however, is a rather circular argument, as higher oil and gas prices are pushing up inflation, which in turn, prompts rate hike actions from central banks.
By Alex Kimani for Oilprice.com
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It has nothing to do with Saudi Arabia’s voluntary production cut. Experts and analysts alike should wake up and accept that the Saudi cut has nothing to do with the market and everything to do with Saudi production difficulties. 90% of Saudi production for the last 70 years has been coming from five giant fast-depleting and aging oilfields which are more than 75 years old and being kept producing by injection of billions of barrels of water. That is why a reduced Saudi production is going to become a permanent feature of the market. By 2030 I project that Saudi Arabia could be left with an estimated 120,000-400,000 barrels a day (b/d) to export at which time it would have virtually ceased to remain an exporter.
Long-term, the longevity of $100 oil comes down to steeply-declining Saudi production as outlined above, depleting global reserves and declining global production capacity.
According to my assessment of Saudi proven reserves over a period of 20 years, I estimate Saudi reserves at this minute at 35.31 billion barrels (bb) enough for almost 10 years of Saudi production of 10.0 million barrels a day (mbd) and not 267 bb as the Saudis have been declaring for the last 25 years despite their production and absence of new discoveries.
Based on the above, prices are on an upward trajectory which will take them much higher than current levels with Brent crude breaking through $100 soon. Moreover, a $100 oil is sustainable particularly that the market will soon face shortages which could push Brent crude towards $110.
And to complicate matters further, neither OPEC+ is capable of lifting its production significantly nor are non-OPEC producers such as the United States, Norway, Brazil and others in position to do so either.
Dr Mamdouh G Salameh
International Oil Economist
Global Energy Expert