What is next for Brent Crude; $147/bbl or $100/bbl

What is next for Brent Crude; $147/bbl or $100/bbl

Indian Market
by 5paisa Research Team Last Updated: 2022-08-08T19:02:28+05:30

As Brent prices touched $117/bbl on Thursday, the million dollar question was whether the price of crude would touch $147 (the previous peak in 2008) first or would it scale back to $100/bbl. Both the possibilities but experts feel that the next few days could be critical as the direction of the Ukraine war could be a key determining factor. Russia accounts for 11 million bpd of oil and contributes nearly 8% of the world oil supply.

Experts are of the view that If energy sanctions are imposed against Russia, then EU will not be able to buy oil from Russia. That would be a problem since Europe depends on Russia for nearly 33% of its energy requirements in the form of oil and natural gas combined. Hence stringent energy sanctions on Russia would mean oil takes out $147, the previous high. If these sanctions are not imposed, then $100/bbl on crude is a real possibility as longs cover.

Just to put things in perspective, crude was around $68.87 at the start of December 2021. Since then, crude has rallied by 70% in just 3 months. Since the Russia war like situation came to the forefront, the price of crude is up by nearly 20% in less than a week. This is surely a dramatic movement in price and it would now depend on how drastic a step that the US and the EU are willing to take. China’s response would matter too.

What some of the oil analysts say is that oil price is not just about oil demand and supply but also coal demand and supply. The world is already undersupplied with coal and that has been causing power shortages globally. However, Russia is one of the largest producers of coal and if these sanctions constrain the output of coal, then consumers may increasingly look at oil as an alternate source of energy. That is also leading to a surge in oil demand.

 

Check - Oil prices fall as tensions ease on the russia ukraine border


Interestingly, OPEC has refused to increase its output beyond 4 lakh barrels per day, at a time when the markets were already undersupplied by around 2.5 million barrels per day. In short, the oil markets were anyways tight even before the geopolitical tensions. Even the expectations that Iranian oil was going to enter the world energy market have been belied for the time being. So, it looks like oil needs to live under shortages for now.

In short, the general consensus view in the oil market is that it could be both ways. Any toughening of sanctions on Russia would push oil closer to the previous peak of $147/bbl recorded in 2008. However, if things were to normalize then the oil markets could see $100/bbl or even lower. A lot would eventually depend on how the Western response to the Russian aggression pans out. If 2017 is any indication, EU may be a tad more cautious.

The one big risk to the entire equation is if there is a collapse in demand. We saw that happen in 2008. Of course, the situation is nowhere close to being as bad as in 2008, but then things can deteriorate quite rapidly if demand vanishes. That could put the world into a prolonged recessionary trend. That is a possibility that is best avoided, especially for a country like India, which is just about seeing green shoots of an economic recovery.

Also Read:-

Why is crude beyond $100/bbl and what does it really mean

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