Former BP Chairman Bob Dudley said six years ago that oil prices would be lower for longer. But that was six years ago.

Today, analysts are predicting higher for longer. Crude prices are at seven-year highs — above $80 a barrel  and analysts are betting that the bull market in energy has more room to run — at least through mid-2022. Some of the country’s biggest banks, such as Goldman Sachs, have forecast oil again reaching the mystical $100-a-barrel level; Bank of America is predicting oil will reach $120 by 2022.

The surge in crude prices has its roots in the pandemic, which, in the spring of 2020, drove oil prices briefly into negative territory — meaning oil suppliers were paying buyers to take crude off their hands. The economic destruction caused by COVID-19 became another catalyst for a transition in the energy sector, spurring oil companies, already under pressure from advocates, investors and customers, to shift focus and investment toward clean energy technologies as petroleum demand plunged to historic lows.

Saudi Arabia, the de facto leader of OPEC, has blamed the lack of investment in oil and gas development for the surge in prices. But the flood of oil that crashed prices in 2020 also imposed new discipline on OPEC to curb production — a discipline that continued last week as the expanded cartel known as OPEC+ stuck to its plan of gradually increasing output despite pleas from the United States and other major oil consumers to open the spigots.

U.S. producers, meanwhile, are maintaining their own discipline, cautiously boosting production, which remains nearly 2 million barrels a day lower than the pre-pandemic peak of 13.1 million barrels a day, according to the Energy Department. As a result, U.S. commercial crude inventories are running 6 percent below average for this time of year.

The constrained supplies coupled with the rebound in demand as the global economy emerges from the pandemic have led to rising energy prices that are far outpacing increases in other goods and services. The Labor Department, for example, recently reported that the cost of going out for dinner rose 4.5 percent during the 12-month period ending in September. Energy prices soared more than 40 percent.

Ed Longanecker, the president of the Texas Independent Producers & Royalty Owners Association, a trade group, said he expects oil prices to rise near $90 a barrel and stay there at least through the winter. Typically, a rapid rise in oil prices would lead to a correction by providing incentives for oil companies to produce more and customers to consume less. But the lack of investment in oil and gas projects, supply chain bottlenecks that are making it harder to obtain materials and equipment for exploration and production, and resilient demand are creating a combination of market forces that should continue to support high prices, Longanecker said.

“Many factors point to a higher for longer scenario for commodity prices,” he said.

Supply and demand

Denton Cinquegrana, chief oil analyst at the Oil Price Information Service, a unit of the consulting firm IHS Markit, agreed. He also expects oil to climb near $90 a barrel, further supported by soaring natural gas prices in Europe and Asia that are driving power generators and other industrial customers to shift to coal and oil.

“Overall (oil) futures are likely to average somewhere in the $85-$87-per-barrel area through much of the winter, based on a potential colder than normal winter and inventories still below seasonal norms,” Cinquegrana said. “A run toward $90 also seems to be in the cards.”

Giovanni Staunovo and Wayne Gordon, strategists at the Swiss financial services firm UBS, said in a research note to investors that supply isn’t keeping up with demand. Even with inventories low, producers seem unwilling to put more oil on the market. Oil storage inventories for the 38 industrialized nations belonging to the Organization for Economic Co-operation and Development are at their lowest level since 2015.

Resurgent demand, coupled with only moderate supply growth, suggests oil prices could remain elevated for the foreseeable future, hitting $90 next month before leveling off at about $85 a barrel through 2022.

Stein’s Law — formulated by Herbert Stein, the chairman of the Council of Economic Advisers under two presidents in the 1970s — states that if something can’t go on forever, it will stop. Market swings are an ingrained part of the economy.

Oil peaked at a staggering $145.31 per barrel in late June 2008 before the Great Recession sent it plunging to $32.94 by the end of that year. In 2014, crude climbed above $107 a barrel, then began a slide that didn’t end until early 2016, when prices bottomed at about $26 a barrel.

Last year, WTI traded in negative territory for a brief period in April, demonstrating the wild swings that oil prices can make.

Ole Hansen, the head of commodity strategy at Saxo Bank in Denmark, said he expects markets to remain tight at least for the next three to six months and oil to stay at $80 a barrel or higher. The shift from natural gas to crude oil added around $5 per barrel to the price of oil for October.

Dudley’s ghost

Hansen also pointed to other frequently cited factors: the economic rebound and the shifting for investment from oil and gas to clean energy.

The combination of an overstimulated global economy driving a strong recovery for fossil fuels and the intense focus on the energy transition towards greener solutions — driving reduced appetite for fossil fuels investments — are the two main engines behind the prospect for elevated crude oil and with that fuel product prices,” he added.

Bob Dudley may have been correct in pointing out that trends can be long lasting. But for now, it seems like his mantra is reversed — crude oil prices may be higher for longer.


 Written By

Daniel Graeber