Oil Prices Get Another Boost From Saudi-Yemen Dispute, How Long Will The Rally Last?

An attack by Yemen’s Houthi rebels on oil facilities in Saudi Arabia on Friday gave oil prices a further boost as markets tried to digest a fresh round of sanctions on Russian oil.

The oil market has rallied strongly in recent months, taking WTI crude well above $120 a barrel. Oil prices have been boosted by strong demand after the pandemic recession ended and the recovery and tight supply due to production constraints.

Then there is the war between Russia and Ukraine, US-EU sanctions on Russian oil and growing market expectations of supply disruptions due to the ongoing war.

How long will the rally last? Oil industry analyst Theophanis Matsopoulos doesn’t see the bull market in the oil market lasting too long.

“Most of the rise in oil prices is a matter of expectations,” he said. “Expectations about oil supply disruptions and expectations that the world will stop buying oil from Russia. Neither will occur.”

But he doesn’t see those expectations coming true.

“Sanctions are not the same as embargoes,” Matsopoulos said. “The EU will not join America in cutting Russian oil imports. They can’t afford that.”

And without expectations being met, oil prices will have to go back down.

“The oil market is clearly volatile, with a daily movement of 5% (or more) not that unusual,” said Jay R. Young, founder and president of King Operating Corporation and author of The Upside of Oil and Gas Investing.

“In the short term, something depends on trade; long-term, we’ve been demanding oil at $120/barrel or higher for quite some time… and that was before Russia invaded Ukraine and sanctions were imposed on Russian oil purchases.”

The reason?

“Global demand will increase as we emerge from the pandemic and approach the busy summer travel season,” Young said. “Meanwhile, supply is not keeping pace for a number of reasons, including the Biden administration’s restriction on drilling on state land in the US.”

Young sees the oil bull market as sustained over the long term. “All signals point to significantly more expensive oil and gas worldwide,” he said.

DailyFX analyst Thomas Westwater sees both tailwinds and headwinds for the oil market rally. The tailwind could come from an end to COVID-19 lockdowns in China, which would boost demand growth prospects from the world’s second-largest economy. Headwinds could come from an increase in US domestic supply.

According to data from Baker Hughes, the number of oil rigs in the US rose to 670 from 519 in the week ended March 25.

“That’s the highest level since April 2020, even though oil production per rig has declined,” Westwater said. “The reduced production is an unfortunate side effect of shutting down and restarting rigs – it reduces effectiveness. Still, the numbers are encouraging, but it will be some time before production ramps up to the point where prices would fall even further.”

CruxOCM’s Rebecca Greenan doesn’t think things are that simple.

“The structure of the global oil market will change because of Russia as well as the fossil fuel discussion and the need for an energy transition strategy that allows alternatives to be developed before we sacrifice the industry,” she said.

“How high the price of oil will go depends on energy policies and how they deal with legacy energy sources. With the US midterm elections later this year, there will be pressure on Biden and the Democrats as the relationship between the president’s popularity and the price of gas is well established in the political literature.”

© Copyright IBTimes 2022. All rights reserved.

Leave a Reply

Your email address will not be published.