Will Oil Prices Hit $100?

Medium-term projections for oil prices might not be enough to offset short-term risks, pushing crude prices into the triple digits.

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The latest trends

Mid-January, crude prices hit a multi-year high of $87/bbl, then the market backed off for a few days - only to surge again, reaching a peak at $93.50/bbl in February, 7% away from the triple-digit marker. Naturally, speculation has abounded that crude could pass $100/bbl, and even go further.

The price has slipped down to $90/bbl, since then. That opens the question of whether price action in the last few days has been a pullback before the next push or whether we've already seen the high-water mark.

"Discipline Premium," OPEC and Biden

With OPEC reluctant to move from their gradual production increases, supply has to come from outside. One of the biggest reserves is US shale, which costs more to produce. So, when oil prices rise above a certain level, it makes economic sense to start producing shale - called the "Discipline Premium" - then production should increase.

The Biden Administration has been encouraging increased production to deal with increased prices at the pump and increased inflation. But the White House and most developed governments are also pushing to move away from fossil fuels in favour of green alternatives, meaning the investment dollars into new production is not what it once was.

Short term vs. long term

Production increases require investment, and if there isn't much confidence that prices will remain elevated for an extended period of time, then there isn't much motivation to increase production for the short term. OPEC estimates that the current extraordinary demand is due to demand switching because of high natural gas prices primarily attributable to geopolitical risks. If that’s the case, demand could drop relatively quickly, along with the price.

In the meantime, global crude inventories are below the 2015-2019 average and continue to fall. But that is expected to change within the next couple of months. So, with little incentive to increase production because of a short-term price spike, the fundamentals for holding the price in check don't seem to be there as long as the current geopolitical conditions persist.

How high?

WTI has been on a 7-week streak and looks well overdue a pullback. The last time it was on such a streak was the Aug-Oct period, where it printed nine consecutive weeks of bullishness. Can it do it again? Maybe.

Source: Spreadex Trading Platform

The weekly candlestick chart show a rising trend above the 50-week moving average. The price broke out above long term resistance near 87, confirming the bullish strength. However a rising wedge pattern, which tends to resolve lower poses downside risk, especially when combined with bearish RSI divergence.

Key Takeaways

Oil prices have been driven by geopolitical risks and its now become consensus that the black gold will reach $100/bbl.

While inflation risks ultimately slowing consumption and the economy, for now oil prices are rising to reflect overall prices and a robust global recovery. Supply from OPEC is steady so it might need rising US shale production to change the demand/supply equation, but shale lacks long term investment incentives. Until then, traders will be observing geopolitical developments to assess the short-term state of affairs.