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Crude oil prices hit 7-year high; Goldman Sachs sees it at $100 by third quarter 2022.

Date: 19-01-2022
Subject: Crude oil prices hit 7-year high; Goldman Sachs sees it at $100 by third quarter 2022
Crude oil prices soared to their highest levels in over seven years as geopolitical tension intensified in the Middle East raising concerns over likely supply disruption in an already tight market.

Brokerage Goldman Sachs said in a note that it sees Brent prices at $90 per barrel in the first quarter of 2022, $95 in the second quarter and $100 per barrel in the last two quarters of the year. It raised its Brent oil price forecasts for 2022 to $96 and 2023 to $105 per barrel from $81, $85 per barrel, respectively.

"Importantly, we are not forecasting Brent trading above $100 per barrel on an argument of running out of oil as the shale resources is still large and elastic," the brokerage said in a note on January 17.

On January 18, benchmark Brent crude futures touched highs of $88 a barrel, its highest since October 30, 2014. Prices have been rising from lows $68 in the beginning of December as demand remained strong, unperturbed by the rapid spread of the Omicron variant of Covid, even as global supply remained tight. The attack by Yemen's Houthi group on United Arab Emirates on Monday and the possibility of a retaliation by the latter has only added to the upside that experts said may continue.

“Robust fundamentals have reversed last year’s oil price melt-down, with the market remaining in a surprisingly large deficit as the Omicron demand hit is so far smaller (and likely briefer) than that of Delta excluding China. While the hit to Chinese demand will be large due to its zero-Covid policy, we see it offset by strong demand in 4Q21, gas-to-oil substitution and supply disappointments. Net, we expect inventory draws to narrow but persist through 1Q22, with the global surplus in 2Q22 smaller than seasonal at 0.4 mb/d,” Goldman Sachs said.

The Organization of the Petroleum Exporting Countries (OPEC) and its allies, also known as OPEC+, have been slowly easing the output cuts that were put in place to support prices when demand had plunged in 2020. But some smaller producers have not been able to scale up output and the industry has been jittery over concerns that there could be demand fluctuations due to Covid variants. Prices have also been pushed up on worries over supply disruption in as the threat of a Russian attack on neighbouring Ukraine intensifies.

On the Multi Commodity Exchange (MCX), the February crude oil futures touched a high of Rs 6,347.00 a barrel on Tuesday, up close to 2% from the previous close of Rs 6,233.

For India, this translates into a higher oil import bill as the country imports almost 82% of its requirement. The government will have to walk a tight rope as it the rising import bill can dent fiscal deficit; it is scheduled to release its Union Budget for FY23 on February 1.

ICICI Direct Research said in a report, “We expect the rupee to depreciate on elevated crude oil prices and persistent FII outflows. Investors fear that a surge in crude oil prices will lead to rise in inflation and even impact current account deficit. Furthermore, market participants fear that elevated inflation has pushed major central banks across the globe to tighten monetary policy, which, in turn, may prompt foreign investors to pump out liquidity from emerging markets.”


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