Oil prices have surged to their highest level since 2014 recently; Brent oil futures have traded as high as $89 per barrel, and the uptrend in the price of oil seems to be only picking up more steam. Trades are speculating that oil prices can surge to $100 per barrel very soon, and can reach as high as $150 per barrel.

Goldman Sachs increased its price target for Brent to $100, along with other banks echoing this last year before the arrival of omicron. The covid variant triggered a major sell-off, and Brent reached a low of $65 on December 12 last year. Ever since, oil prices have been soaring, and the big question for traders and investors is if we are going to see the $100 mark for oil prices. This question can be answered by looking at the following four factors, which are very much driving oil prices:

1. OPEC And Supply

The first is that oil’s demand and supply equation is out of whack. OPEC+ has been keeping tight control over supply since oil prices crashed into negative territory in 2020. Ever since, the cartel has only been gradually increasing its oil supply. When it comes to OPEC, there are two major fundamentals that are important. First, the cartel doesn’t want to increase the supply aggressively as it is more than comfortable with oil prices where they are, and it is in their interest to see higher oil prices. Secondly, the spare capacity that OPEC has is also diminishing.

According to a recent report, OPEC’s spare capacity has dropped to nearly 4 million barrels per day. This used to be close to 11 million barrels per day not long ago, meaning that even if OPEC wants to increase oil supply aggressively, it is going to struggle because of its spare capacity.

2. Demand For Renewable Energy

The second factor influencing oil prices is that there is a gigantic shift from fossil fuels to renewable energy. For this reason, many companies have reduced their CAPM in this space, and lenders aren’t willing to commit new capital towards fossil fuel projects. Due to the lack of new capital in the fossil space, energy companies are using what they have to meet the new oil supply, which is immensely difficult.

It’s also worth noting that countries around the world are introducing tighter regulations to control carbon footprints, and consumers are increasingly demanding electric cars. In 2021, we saw another record number of EV car sales, and it is highly likely that EV car sales will more than double this year as supply chain issues are resolved and more companies begin to produce more electric cars.

3. Omicron Isn’t Devastating For Oil Demand

Thirdly, omicron isn’t adversely influencing oil demand as much as previously anticipated. Yes, we did see some travel restrictions, but now they are being rolled back. The regional lockdowns that were introduced have only lasted for a very short period of time. In addition to this, there are some glimmers of hope that the end of the pandemic is also in sight, which could mean more demand for oil.

4. Geopolitical Tensions: Russia, U.S. and UAE

Finally, considering the ongoing geopolitical tensions, which are becoming worse day by day. U.S. President Joe Biden is adopting a strong stance against Russia, and has vowed to punish Russia if it attacks Ukraine. In addition to this, we have seen attacks on oil tankers in the UAE in recent weeks, which has increased the threat of further supply disruption.

The bottom line is that these geopolitical tensions are creating supply disruptions that many traders think are a negative factor but positive for oil prices.

What Should Traders Do?

As a trader, it’s very likely that the current uptrend is likely to continue, and the factors mentioned above are going to continue to push oil prices higher. Any adverse change in geopolitics could easily take the oil price towards $150. Absent that, Brent is more than likely to continue its move towards the $100 mark, but it may struggle to move higher from there.

Investors who have a long-term view may want to wait for the oil price to reach its peak level and then may begin to short oil. Fossil fuel has little to no future in the coming years, and companies like Exxon Mobile have already declared that they will become carbon neutral by 2050.
Source: Naeem Aslam, Nasdaq