“There’s insufficient supply in the face of strong demand,” Courvalin said in a call with reporters Friday. “Oil prices have to be higher to overcome the higher cost of capital to fund projects.”
The recent $10 dip is the equivalent of pricing in a loss of 5 million barrels a day of demand for three months. That’s likely an overreaction, Courvalin said, as governments seem to be responding to omicron with more testing than new lockdowns so far.
Longer term, output growth is being hit by challenges including upstream cost inflation and more expensive financing as investors opt to support ESG-focused sectors, he said. Investments in long-cycle oil projects have also dipped due to uncertainties around energy transition and its impact on fuel usage.
Demand for everything from gasoline, diesel and plastics is currently at a record level, with consumption expected to reach new highs in 2022 and 2023, he said. Use of jet fuel will continue to lag due to Covid-related travel restrictions, but some pent-up demand for travel is likely to emerge as borders reopen.
Demand is being supported by strong government capital expenditure, both to support the economic recovery from Covid and to fund the energy transition needed to combat climate change. An increased focus on income inequality will also support commodities, as poorer people tend to spend a higher portion of their income on goods and energy.
Oil prices could go as high as $110 a barrel if supply can’t keep up and the market needs demand destruction in order to balance, he said.
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