Oil Prices Could Go Even Higher

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Researched by Daniel Graeber for Industrial Info Resources (Sugar Land, Texas)--Major investment firms are raising their forecasts for crude oil prices, citing the lingering supply-side challenges that are adding up among the world's major producers.

British banking giant Barclays on Monday increased its forecast for Brent crude oil by $11 to $111 on average for the year, citing the potential loss of around 1.5 million barrels per day in Russian crude oil.

"Limited spare capacity and constrained U.S. supply growth mean inventories are likely to remain tight over our forecast horizon, barring a significant slowdown in demand due to spillover effects," the bank stated.

Separately, Citi Research pointed to stalled negotiations with Iran over its controversial nuclear research program as cause for an upward revision to its oil price forecast.

Both Brent crude oil and West Texas Intermediate were holding at about $120 per barrel on Monday, compared with $70 per barrel one year ago. Supply-side issues suggest $150 could be in the cards.

Those supply-side issues are largely the result of Western-backed sanctions targeting some of the world's major oil producers. Venezuela was targeted with U.S. sanctions over the lack of transparent elections; former U.S. President Donald Trump tore up the nuclear agreement that let Iran put its oil on the open market; and Russia joined the pack in February after it decided to launch an unprovoked military invasion on Ukraine.

For all intents and purposes, that leaves market balance largely in the hands of the U.S. and Saudi Arabia. Of those, only Saudi Arabia has the means to put more oil on the market in short order.

Saudi Arabia is the de facto leader of the Organization of the Petroleum Exporting Countries (OPEC), which--along with its non-member state allies in the OPEC+ group--opted to put more barrels on the market come July and August. The only problem there is that allotment still includes Russia, which is tacitly limited to the Asian market because of Western pressure. OPEC+ is a large and diverse group, but the heavy lifting is left to only a select few.

"All things considered, the odds are that the actual OPEC+ output hike will undershoot the pledged amount," Stephen Brennock, an analyst at London oil broker PVM, said in a research note Monday. "History has shown that when it comes to OPEC promises, actions speak louder than words."

All that brings us to a shift in global dependencies away from OPEC, away from Russia and toward the U.S., which may be starting to feel the strains of overextension.

We've already started to see some strains in general in the U.S. South, the source of most of the nation's oil and the origin of most of its crude oil exports. The perception among those in the Texas service sector is turning sour, and the Federal Reserve Bank of Dallas found that manufacturing, a near-rival to the shale industry for the state economy, may be showing some weakness.

Meanwhile, domestic crude oil inventories are 11% below the five-year average for this time of year, and the sector as a whole is strained. Refineries are running at more than 90% of their peak capacity, a pace they can't sustain for long, and there's only so much more that U.S. shale oil producers can do. It can take several months before drilling turns into production, so the U.S. cannot play the same market role as Saudi Arabia.

Without Iran, Venezuela and Russia, the odds therefore seem stacked against the world's major oil producers and, barring any dramatic demand destruction, commodities are in for a higher-for-longer future.

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