Oil at $85 per barrel hits seven-year high on Middle-East tensions

Oil prices

Oil prices are continuing their steady ascent, with geopolitical tensions adding to an already bullish market for energy commodities. Although other factors, such as a weaker-than-feared Omicron variant, are also playing a role in the rise of oil prices, investors are paying more attention to what’s happening overseas. In particular, political tensions in oil-producing areas threaten to curtail supply once again and drive up prices.

West Texas intermediate ended the day at $85.4 per barrel, a 1.9% bump from yesterday’s prices, while Brent crude saw a similar percentage increase. That’s the highest closing level seen since October 2014, when oil prices fell as a result of the shale-induced crash. In contrast, while the energy sector was up, the rest of the markets reported significant losses across the board.

The main catalyst for this recent jump in price is the Abu Dhabi oil facility attack. Iran-backed Houthi rebels claimed responsibility for the attack against the United Arab Emirates facility, which killed three people and injured many others.

The damage to the UAE oil facilities in Abu Dhabi is not significant in itself, but it raises the question of even more supply disruptions in the region in 2022,” warned senior oil markets analyst Louise Dickson. “The attack raises the geopolitical risk in the region and may signal the Iran-U.S. nuclear deal is off the table for the foreseeable future.” She added that should this happen, that would mean Iranian oil would also be off the market, further boosting prices as demand moves elsewhere.

Other analysts made similar warnings. Goldman Sachs stated that should similar attacks like these take place, oil could easily rise to over $100 per barrel sometime this year. While good for energy companies, higher prices are also accelerating inflation, with the CPI taking into consideration these ever-volatile energy prices. A large portion of the recent 7% inflation rate is due to this rise in energy prices.

Amidst everything that’s going on, oil production is continuing to increase. According to a report from the Energy Information Administration, Permian oil output is growing to over five million barrels per day starting in February. That’s the highest level seen since March 2020 when the pandemic first kicked into gear. Total shale output is growing to 8.3 million barrels per day as well. While oil and shale production is stilling lags pre-pandemic levels, the Permian basin has recovered remarkably quickly given the low production costs.

At the same time, OPEC forecasts that the world’s demand for oil will continue to go up. The cartel predicts that the world requires over 100.8 million barrels of oil per day, a 4.2 million bbd increase compared to 2021. Most of this increase is due to the rising demand for light distillates. As long as this current environment stays the same, it’s quite likely that oil will indeed jump over $100 per barrel once again.

In response to all this, investors are continuing to bid up on shares of big energy companies. Chevron (NYSE: CVX) is up more than 10% this month, while Exxon Mobil (NYSE: XOM) has gained over 19% over the same period.