Oil rally slows after hitting seven-year high as US inventories rise

Crude could hit $100 per barrel this year on the back of higher demand, according to analysts

Brent touched $89.50 a barrel on Thursday, its highest since 2014, as global economies continued to recover from the coronavirus pandemic. Reuters

Oil prices on Friday edged lower after hitting a seven-year high during the week, dragged down by reports of a rise in US crude inventories.

Brent, the international crude benchmark under which two thirds of the world's oil trades, closed 0.55 per cent lower at the end of the week to $87.89 a barrel. West Texas Intermediate, which tracks US crude grades, finished the week down 0.48 per cent to $85.14 a barrel.

The global benchmark had touched $89.50 a barrel on Thursday, its highest since 2014, as several economies continued to recover from the coronavirus pandemic, pushing demand higher in parallel to geo=political concerns.

“Crude oil futures fell ... as demand destruction fears crept over supply concerns even as the IEA (International Energy Agency) forecasted higher oil demand in 2022,” said Avtar Sandu, senior manager of commodities at Singapore's Phillip Futures.

A new report released by the US Energy Information Administration on Thursday pointed to an increase in oil inventories in the world’s largest crude consumer. Crude stocks rose by 515,000 barrels last week, while gasoline inventories jumped by 5.9 million barrels, boosting those inventories to their highest in a year.

Paris-based IEA, however, said it expects continued global demand for crude in 2022 and raised its forecast for the year by 200,000 barrels per day to 99.7 million bpd.

The pullback in prices “is not surprising after oil’s boisterous gains this week, the red hot oil market has remained in deep overbought territory for some time and a healthy correction has been on the table,” said Ehsan Khoman, head of emerging markets research at MUFG Bank.

Moving forward, the market narrative is firmly with “oil bulls, centred on depleted inventories, low spare capacity and resilient demand”, he said.

Brent could reach $100 a barrel if "the bullish trend" continues, while $75 would be the near-term downside risk, Emirates NBD said in a research note earlier this week on Tuesday. Goldman Sachs expects oil to rally to $100 in the third quarter this year after previously forecasting prices to hover at $85 in 2022.

The supply-side fundamentals certainly support prices surging to $100 could happen by the summer and the oil market "should remain very tight and if we have any disruptions to productions, that should easily send prices much higher", said Edward Moya, a senior market analyst at Oanda.

Opec+ group, led by Saudi Arabia and Russia, agreed to add more oil to the market in February due to higher demand. The 23 member group will add an additional 400,000 bpd to the market next month.

The drop in investments in the hydrocarbons sector amid green transition efforts by governments is also supporting oil prices.

The total investment in the upstream sector of the oil and gas sector fell 23 per cent below pre-pandemic levels to $341 billion in 2021, according to a report by the International Energy Forum.