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How high can it go?

Oil futures set new record highs on Tuesday and further gains look probable. On Tuesday, New York light crude set an all-time high of $118.05 a barrel, while Brent futures for June delivery reached a record of $115.03/b.

The non-appreciation of the dollar – which has caused a steady flow of investment funds into commodities – is widely regarded as a primary cause of seemingly unstoppable oil-price inflation. And, say analysts, there is little indication that prices have topped out, as technical momentum from the recent rally continues to push futures into unchartered waters: prices are likely to reach at least $120/b before easing and may well reach $125/b or $130/b. Robust support is seen at the $106-109/b level.

Geopolitical events are also providing support, primarily fears of disruptions to Nigerian crude exports – an important source of oil for the US market. Royal Dutch Shell has said that it may not be able to honour contracts for April and May from the Bonny Terminal after a militant group attacked two of its pipelines.

Opec's production policy remains a bullish factor, according to the Centre for Global Energy Studies (CGES), which argues that Opec continues to underestimate the amount of oil the market needs; CGES projects that non-Opec oil supply will grow by no more than 0.6m b/d this year – significantly lower than Opec's growth assessment of 0.9m b/d. Global stock cover, meanwhile, remains uncomfortably low by historical standards, making futures particularly sensitive to fears of supply disruptions.

Meanwhile, on the demand side, upside pressure on prices is only likely to increase: refineries are returning from maintenance and next month US gasoline demand will begin to rise as the summer driving season begins.

Based on International Monetary Fund projections of a deteriorating economic environment this year and next, the International Energy Agency (IEA) says the economic outlook is largely the cause of a 460,000 b/d downward revision to its forecast for 2008 oil-demand growth, now 1.3m b/d. But it also points out that supply constraints may compensate for weaker demand. Recent pipeline sabotage in Nigeria and Iraq and a strike in Gabon may not, individually, be particularly serious, it says, but "together they illustrate the potential for downside supply risks".

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