Oil: From Sizzle To Fizzle

  • Tensions in Eastern Europe and the global energy crunch have lifted oil prices higher.
  • Oil has overshot our fair value estimate of $75 a barrel due to demand expectations.
  • A nuclear agreement with Iran could lift sanctions and allow it to export more oil.

Oil prices have rocketed to seven-year highs due to supply disruptions, rising demand, geopolitical tensions between Russia and Ukraine, and the cold snap in the United States. Futures for West Texas Intermediate (WTI), the U.S. benchmark, surpassed $93 a barrel over the last week, the highest since 2014. Brent crude futures, the benchmark in energy markets, also rallied above $93 a barrel in early February.

But we see risks to the rally because current prices are unsustainable. As such, we have a bearish view on oil over the short and long term. We expect WTI prices to drop to around $75 a barrel by the middle of 2022, with a risk of a deeper correction to $60–$69 a barrel.

Freezing weather and Russia–Ukraine crisis blur outlook

Oil prices have overshot supply-demand fundamentals and the physical market dynamics. Among the factors driving the rally are concerns that tensions in Eastern Europe will spill into energy markets by denting supplies from major crude producers. Other contributing issues are bottlenecks in global oil supply, frigid U.S. weather, and expectation from traders that strong demand will recover this year.