Oil Price Set to Test Fresh Peaks Barring Iran Breakthrough

LONDON (Reuters) — Efforts by governments to drive an economic rebound are likely to add strain to tight oil supplies and could send prices to fresh peaks, unless international talks end sanctions on Tehran and lead to a surge in Iranian exports.

High energy prices are fueling global inflation already at multi-decade highs in Europe and the United States. The last time oil prices were above $100 was in 2014, having stayed above that threshold for more than a year.

International oil prices rose to just short of $100 a barrel on Tuesday as traders weighed a possible disruption of exports from major oil producer Russia after President Vladimir Putin's decision to recognize the independence of two breakaway regions in Eastern Ukraine, ratcheting up tensions with the West.

Prices remain a long way off the record peak of more than $147 hit in July 2008.

Still, as in 2008, when it took less than five months to soar from roughly current levels to the record, the world is seeing fast economic growth, tight supplies and a lack of spare capacity to provide a cushion against geopolitical shocks.

As the Organization of the Petroleum Exporting Countries (OPEC) and its allies, collectively known as OPEC+, gradually unwind output cuts implemented in response to the record demand fall at the height of the COVID-19 pandemic in 2020, JP Morgan predicts that the producer group will continue incremental increases but underperformance by some members will drive prices.

"Supply misses are rising. Market recognition of strained capacity is also growing," the bank said. "We believe this should drive a higher risk premium ... circa $125 a barrel as early as 2Q 2022 and $150 a barrel in 2023."

A rise in summer travel and falling spare capacity could send prices to $120 a barrel, Bank of America Global Research said on Tuesday.

Iranian Barrels

Not so fast, analysts at Citi say. They point to the possible unwinding of U.S. sanctions on OPEC member Iran as diplomats on both sides say progress is being made in talks.

A deal could add about 500,000 bpd into the market by April or May and 1.3 million bpd by the end of the year, which, along with a rise of around 2.8 MMbpd from Canada, Brazil, Iraq, Venezuela and the United States, could push prices below $65 a barrel.

"Most market analyses of prices for the year ahead have focused on a lack of surplus production capacity and have ignored the likelihood of a return of Iranian oil to markets", Citi said.

Research consultancy Energy Aspects offered a more bullish view, saying the lifting of sanctions should not drive prices below $80 this year.

Central to a more cautious outlook is the possibility that a price rise will lead to more production of the shale oil lying under the southern United States.

"Up to 2.2 million bpd of U.S. tight oil could be unleashed in the event of a supercycle – with oil prices remaining around or above $100 per barrel," said consultancy Rystad Energy.

While prices could drive more production, RBC Capital Markets commodity strategist Michael Tran does not expect much impact on demand.

"We see upside visibility for prices to touch or flirt with $115 a barrel or higher this summer ... markets led higher by tightening product and crude inventories are difficult to solve, absent a demand destruction event or a supply surge, neither of which appears to be on the horizon."

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