5 Reasons Oil Could Climb Back to $100 a Barrel

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Oil could climb above $100 a barrel before the end of the year, reversing a steady drop in prices that started when demand tumbled over the summer.

Making the case is Natasha Kaneva, head of commodities strategy at

J.P. Morgan
.
She expects a shift of several factors to lift the barrel price, which has been stuck between $80 and $90 the past couple of weeks.

Oil fell below $100 in the middle of the summer, dovetailing with a clearly slowing global economy and China’s pandemic restrictions.

“Despite fears over the strength of the global economy, our balances continue to suggest that surpluses observed over summer will turn into deficits starting from October,” Kaneva writes.

Others dispute Kaneva’s bullish assessment, citing rising inventories of crude as evidence that demand is still too low to justify higher prices. 

There are both supply- and demand-related factors that the strategist thinks could lead to a change in the market.

On the supply side, the U.S. is expected to stop selling oil from its strategic national reserve next month. The government has sold about 1 million barrels a day since April, helping prop up supply at a time when producers have been drilling less.

The world uses about 100 million barrels a day, and a reduction of 1 million barrels of supply could have a significant impact—and lead to a shortfall.

Supply could fall by another 900,000 barrels a day starting in December, when Europe bans Russian imports. Other countries could import more Russian oil but are likely to eventually reach their limits.

Supply growth also could be hampered by something that won’t happen. For months, the U.S. and Europe have seemed close to striking a deal with Iran that would have lifted sanctions on Iranian oil and increased global supplies. But that deal now looks less likely, stranding hundreds of thousands of barrels in Iran.

On the demand side, Kaneva expects a jump of 1.5 million barrels a day year over year in the fourth quarter—based on the assumption that the global economic slump isn’t as bad as feared. The European economy is holding up better than expected, and China will start using more oil as its economy bounces back from Covid lockdowns, she asserts. 

“The country is starting to show signs of a better oil demand backdrop with Middle Eastern loadings to China running significantly higher in September, implying higher refinery runs in the fourth quarter of 2022,” Kaneva writes.

Demand also could rise this winter if enough companies and consumers switch their power sources to oil from natural gas, which has reached record-high prices. Some power plants can substitute oil for gas, consequently increasing demand for oil. Kaneva predicts that half of her demand increase estimate will come from gas-to-oil switching.

For U.S. oil companies, an increase in crude prices from $80 to $100 would flow almost entirely to the bottom line—and eventually translate into larger shareholder payouts. For high-yielding companies like

Pioneer Natural Resources

(PXD) and

Devon Energy

(DVN), the rewards could be particularly large.

Write to Avi Salzman at [email protected]