LONDON (Reuters) -- Oil prices that rallied 50% in 2021 will power further ahead this year, analysts predict, saying a lack of production capacity and limited investment in the sector could lift crude above $100 a barrel.
Though the Omicron coronavirus variant has pushed COVID-19 cases far above peaks hit last year, analysts say oil prices will be supported by the reluctance of many governments to restore the strict restrictions that hammered the global economy when the pandemic took hold in 2020.
Brent crude futures traded above $84 on Wednesday, hitting two-month highs.
“Assuming China doesn’t suffer a sharp slowdown, that Omicron actually becomes Omi-gone, and with OPEC+’s ability to raise production clearly limited, I see no reason why Brent crude cannot move towards $100 in Q1, possibly sooner,” said Jeffrey Halley, senior market analyst at OANDA.
The Organization of the Petroleum Exporting Countries (OPEC) and its allies, a group known as OPEC+, are gradually relaxing the output cuts implemented when demand collapsed in 2020.
However, many smaller producers can’t raise supply and others have been wary of pumping too much oil in case of renewed COVID-19 setbacks.
“We don’t want to see $100 a barrel. The world is not ready for that,” Omani Oil Minister Muhammad Al Rumhi was quoted as saying by Bloomberg on Tuesday.
Morgan Stanley predicts that Brent crude will hit $90 a barrel in the third quarter of this year.
With the prospect of depleting crude inventories and low spare capacity by the second half of 2022, and limited investments in the oil and gas sector, the market will have little margin of safety, the bank said.
Standard Chartered, meanwhile, has raised its 2022 Brent forecast by $8 to $75 a barrel and its 2023 Brent forecast by $17 to $77.
J.P. Morgan analysts also expects oil prices to rise as high as $90 by the end of the year.
Current demand strength is acting as a near-term tailwind, having proved largely immune to surging coronavirus infections, the bank said.
Oil prices hit two-month highs on Wednesday on tight supply as crude inventories in the United States, the world’s top consumer, fell to their lowest since 2018, a weaker dollar and easing concerns about the Omicron coronavirus variant.
U.S. crude inventories fell 4.6 million barrels last week to 413.3 million barrels, their lowest since October 2018, the Energy Information Administration said. Analysts had forecast in a Reuters poll a 1.9 million-barrel drop.
“The crude draw was bigger than expected despite a material drop in refining activity,” said Matt Smith, lead oil analyst for the Americas at Kpler, a data firm.
Brent crude futures were up $1.26, or 1.5%, at $84.99 a barrel by 12:21 p.m. EST (1721 GMT). U.S. West Texas Intermediate (WTI) crude futures were up $1.61, or 2%, at $82.81.
The falling dollar was the main driver of higher oil prices, overtaking even the EIA draw, Kpler’s Smith said. A weaker greenback makes dollar-denominated oil contracts cheaper for holders of other currencies.
The dollar fell to a fresh two-month low against a basket of currencies after data showed U.S. consumer prices rose solidly in December.