Oil prices hit a more than seven-year high on Tuesday, threatening to fuel a further rise in global inflation, on bets that demand for crude could outstrip supply later this year.
Brent, the international benchmark, rose 1.3 per cent to $87.63 a barrel on Tuesday, the highest since October 2014 when oil topped $115.
Both Brent and the US oil benchmark West Texas Intermediate have risen about 13 per cent since the start of year, with WTI reaching a high of $85.74. Some analysts predict the crude benchmarks could trade at more than $100 a barrel this year unless supply is increased.
Paul Horsnell, commodities strategist at Standard Chartered, said traders were betting that supply would struggle to keep up with demand as the global economy continues to rebound from the coronavirus induced slowdown that began in 2020.
“The jury’s out on what is the spare capacity, but once the perception is in there that it’s wafer thin, that’s what pushes prices higher,” he said.
The US has called on the world’s leading oil producers, represented by Opec, to increase production faster to help control inflation. US consumer price growth increased 7 per cent year on year in December, the fastest pace since 1982.
But Opec and its allies have so far stuck to a plan agreed in July to replace output cut at the start of the pandemic gradually, by just 400,000 barrels a day each month.
The strategy has helped oil prices track higher since August but not all members of the Opec+ group — which has included Russia since 2016 — have been able to hit their monthly targets raising fears that there is limited spare production capacity in the market.
“Traders will always want to get ahead of a story,” said Horsnell. However, he added that Standard Chartered’s calculations suggested no actual supply deficit would materialise until 2024.
“I think there is enough spare capacity in Saudi, in Iraq, in the Emirates and in bits and pieces elsewhere to mean that there are no circumstances this year, short of a major geopolitical supply interruption, where spare capacity is likely to fall below 3m barrels a day and start feeling a little bit tight.”