Oil prices have made a huge comeback in just over a year.
U.S. oil prices turned negative in April 2020, a never-before-seen move. But, this month, West Texas Intermediate crude hit levels not seen in more than two years as a reopening economy and a rebound in demand fueled a surge in prices. Prices rose by 0.7% to $73.43 a barrel on Tuesday.
“It is back from the dead and it’s incredible to see the run-up in crude prices,” Regina Mayor, global head of energy at KPMG, told CNBC’s “Trading Nation” on Tuesday.
Crude has risen more than 50% this year, tracking for its best first half since 2009. Mayor said the surge in prices comes down to both higher demand and a supply squeeze.
“Most analysts are predicting that the world will return to over 100 million barrels per day of demand by at least the end of 2022 and we’re seeing a surge in short-term demand in the U.S. and China,” she said. “What’s coming home to roost is the underinvestment that the sector has gone through – 30% lower than five years ago in terms of oil and gas investment and $250 billion of underinvestment in 2020 alone.”
In the U.S., for example, oil inventories by mid-June were 6% lower than the five-year average, according to the Energy Information Administration.
“There’s a sense that supply is more narrow, and it may not be enough to cover the pent-up demand. That’s what’s driving the current boost in price,” Mayor said.
But, prices may not remain so elevated once more supply is released into the market, she said. A meeting of the OPEC+ countries this week could put a cap on further gains.
“I suspect that they’ll release another 500 to a million barrels per day. Keep in mind that they still haven’t released all of what they committed to April 1, which was to get 2.1 million barrels per day back by the end of July. We haven’t even seen that supply come into play yet,” said Mayor.
OPEC+ is scheduled to meet on Thursday. That coalition includes the countries of Iran, Iraq, Libya and Saudi Arabia.