Four scenarios where oil prices could go down – Westpac

Between June 30, 2021 and February 23, 2022 Brent lifted 29% but in the week since the Russian invasion the black gold surged a further 29% to $124. What could bring the price of crude back down in the near-term? Strategists at Westpac see four main scenarios.

There are a few paths to lower crude prices, but most seem unlikely

“A de-escalation in tensions, potentially involving a ceasefire agreement over contentious issues such as Ukraine’s involvement with NATO, would result in a rapid correction bringing prices more in line with fundamentals. Talks are continuing with the Ukrainian leader saying he is cooling on the idea of Ukraine joining NATO.” 

“Key gulf producers, Saudi Arabia, UAE and Kuwait, announce they will offset any material disruption in Russian supplies. Together, these three countries could increase output by 2-2.5mbpd in about a month, which could significantly blunt the price effect. Currently, the leaders of the Saudi Arabia and UAE will not take US President Biden’s phone calls.”

“There is an agreement to revive the Joint Comprehensive Plan of Action (JCPOA) between Iran and several world powers including the US which could unlock 60-80mb of Iranian floating storage relatively quickly and add 1mbpd of supply over the next 6-12 months. This is the most likely source of a near term boost to crude oil supplies.”

“US crude production surges – it is currently still below pre-COVID levels with rig counts lagging expectations. But current prices have incentivised smaller operators to expand production while there would also be significant political pressure on the majors to also lift output as well as the economic pressure given current prices and their plans to pull out of Russia.”