Could oil surge to $100?

Demand is heading in the right direction and continues to improve from strength to strength. The summer driving season in the US looks promising and the UK is now mulling removing quarantine requirements for those fully vaccinated (both doses) after returning from traveling. Other countries could follow suit or loosen restrictions for incoming tourists that have been fully vaccinated too. Removing this impediment could really ramp up traveling and see stronger jet fuel demand. Many will want a change of scenery and this pent up desire to be more mobile will only benefit oil consumption. Also, during the height of the pandemic people feared using public transport and resorted to purchasing used vehicles (this has been evident in used car prices surging in the US inflation numbers). Having more private vehicles on the road could further help drive oil consumption.

Moving onto the supply picture, which will require far more digital ink to be expended. Climate change concerns are front and centre with investor pressure being applied on oil companies to scale back production over Environmental, Social and Governance concerns. Additionally, the new US government has shown its keenness towards renewables in an attempt to replace much of its fossil fuel energy requirements. Dutch oil giant, Shell has been forced by a court to reduce its production. The obvious result is lower supply over the next few years. Onto the next key catalyst for oil – OPEC+. Russia has just this week stated it would like to see some more oil released back into the market. Saudi Arabia seem to be more cautious wanting to see clear evidence of the recovery in demand before acting too early. Reports out today indicated that OPEC+ is considering raising production by 500k bbl/d at next week’s 1 July meeting, this helped lift oil prices marginally as a larger 1 mln bbl/d was the expected number. OPEC has to be cautious regarding bringing shale producers back into the mix, as although US production remains disciplined currently, as prices tick higher I would be very surprised not to see these players enter the fray again.

An analysis on oil wouldn’t be complete without touching on the elephant in the room – US and Iran Nuclear Talks. 6 rounds of negotiations have taken place and there is still no deal, dragging on longer than many expected. Biden’s administration are keen to wrap things up before the newly elected Iranian President takes office in August, who is considered a hardliner and could throw a spanner in the works for negotiations. Although key negotiators have been expressing optimism surrounding a deal, oil traders are forced to remain patient on the final outcome. Estimates vary, but we could be looking at roughly 2.5 mln bbl/d of Iranian crude hitting the market in the event sanctions are lifted. If the deal were to collapse and not come to fruition, oil traders would jump on this and initiate longs.

Looking at the futures curve we see a steep backwardation presently. Goldman estimates there is a deficit around 3 mln bbl/d, so clearly supply is already tightening and could get tighter. CEOs of oil majors and large, reputable investment houses have been talking off $100 as a potential target price of where oil could end up. Whether we see crude at $100 is anyone’s guess, but the risks definitely seem skewed to the upside. A stronger dollar could act as a minor nuisance, but won’t be enough to overpower the bullish effect of a supply deficit.

Price is still moving nicely within its ascending channel, it actually peaked its head slightly above the upper trendline of the channel yesterday at $76. There is support around the $72 level and backed up by the 21-day EMA which provides further support. These levels will need to be held for bullish momentum to continue with the lower trend line of the ascending channel being the line in the sand. My only concern technically is the negative divergence appearing on the RSI as price made higher highs, the RSI made lower highs indicating weaker momentum on oil’s push higher, especially as we hover within overbought territory. Upside target would be around $80 and on the downside I'd be monitoring the $72 zone.