Oil supplies are tight and prices could spike to $100 or more per barrel amid heightened geopolitical concerns, but more production from the U.S. and other non-OPEC+ producers could help prevent a prolonged spike. West Texas Intermediate crude prices are up about 15% since the start of the year, underpinned by tight supply, and driven by headlines on global tensions. Russia has been threatening to invade the Ukraine and i s in talks with the U.S . which has asked it to pull its 100,000 troops back from the border. The Middle East is also a continuing source of concern, with the Houthi drone attack on the United Arab Emirates capital Abu Dhabi, a recent unsettling event for oil. U.S. West Texas Intermediate futures this week rose above $85 a barrel for the first time in seven years. Brent futures reached a high over $88 per barrel. Russia's plans for Ukraine are a wildcard for the market. The U.S. has vowed sanctions if Russia moves into the country, but unless there is a disruption in energy supplies analysts do not think it would cause a prolonged jump in prices. "It's difficult to speculate what's going to happen, and if something happens, how it's going to play out," said Francisco Blanch, head of commodities and derivatives research at Bank of America. Blanch said it would not be like the Russian invasion of Crimea. "If they decide to go in and try to take over eastern Ukraine, they would face rebels. It would be very tough." Blanch said oil is vulnerable to a brief upward spike to as high as $120 per barrel, even if nothing happens with Ukraine. He said supplies are tight and demand could soar as Covid recedes. But he expects new supply from non-OPEC producers to offset some of that demand. The high prices would also serve as a dampener since consumers would decrease their use of oil and fuel. Blanch then expects oil to be lower for the balance of the year, with Brent averaging $80 a barrel in the second half of the year, still a high price historically. U.S. as swing producer For now, the surge of more oil from the U.S. and other non OPEC+ producers is keeping oil from rising more sharply. "All things being equal, it's possible the increase in production this year could match the demand growth," said Daniel Yergin, vice chairman of IHS Markit. "Where's the biggest growth coming from? It's coming from the United States. Then there's Brazil, Canada, Guyana. There are other places coming on. If it weren't for the United States coming back, we'd be looking at much higher oil prices." Demand is rising more than expected, and the global energy market is not as well supplied as it might be. The International Energy Agency said this week that the OPEC + coalition, led by Saudi Arabia and Russia has provided only 60% of the increase it announced in December. Countries like Nigeria and Angola are unable to produce as much as they had after a long period of underinvestment, and Russia is nearing its maximum output. "From their annual production in 2021 to the beginning of 2023, these [non-OPEC+] countries together will be up 2.7 million barrels a day," notes Yergin. U.S. producers are turning the spigots back on slowly, even as public companies hold off much new investment and focus instead on returning capital to shareholders. With increased production expected at more than 800,000 barrels a day this year, the U.S., however, once more moving into the roll of swing producer. IHS Markit projects U.S. production will rise from 11.7 million barrels a day at the end of last year to 12.7 million barrels a day in early 2023. Canada is expected to raise its output by 0.1 million barrels a day over the same time frame to 5.1 million barrels a day. Some others include Brazil, which is expected to add 300,000 barrels a day and Guyana at 200,000 a day. Downside risk for oil prices With this additional oil supply expected to hold down price gains, there are also downside risks for oil prices. A major counterbalance for the market is concern about demand from China, the largest importer of oil. "They're the swing demand center," said John Kilduff of Again Capital. "China's a real issue. Their economy is slowing." Kilduff said he is skeptical oil will reach $100 per barrel. In addition to concerns about China, airline bookings remain lackluster and the industry's fuel use is about still about 2 million barrels below pre-pandemic levels. "You also have the central banks working against higher economic growth and taking hot speculative money out of the equation," said Kilduff. The upcoming meeting of the Federal Reserve Tuesday and Wednesday could be a dampener for oil prices since the Fed is expected to move toward a March interest rate hike and take other steps to tighten policy. Ukraine premium For now, the market is closely watching the Ukraine situation and it will be a factor in the oil price until it's clear whether the U.S. will bring sanctions. "Russia has a lot of leverage in this situation, and the most leverage in the winter months. I'm generally constructive on the price of oil, regardless of what's going on in Russia. Inventories are pretty low and demand is about to see a surge. We're running out of spare capacity," Blanch said. Russia's biggest export market for its oil, gas and coal is Europe. Europe receives 38% of its natural gas from Russia, largely through pipelines across Ukraine. If there were an invasion, Blanch said it would be difficult for the U.S. to impose sanctions that would block Russian energy. "The question is are they going to put sanctions on Putin himself, the oil exports, the oligarchs, the oil companies? That's the fear," said Kilduff. If the situation calms down, oil prices could fall as the geopolitical risk premium fades. "If the U.S. doesn't impose sanctions, it could end up being a negative for oil," Blanch said. "Initially the market would rally if the conflict flares up. Conflicts tend to be bad for sentiment and also demand. There tends to be hype in the strike. The strike happens, and the market flares up, and people realize it's actually a negative for sentiment and demand."
A worker wrestles a stand of drill pipe into place on a drilling rig near Midland, Texas.
Nick Oxford | Reuters
Oil supplies are tight and prices could spike to $100 or more per barrel amid heightened geopolitical concerns, but more production from the U.S. and other non-OPEC+ producers could help prevent a prolonged spike.