Oil Nears $100 a Barrel

Oil prices could reach $100 a barrel next year, according to some options traders. The Wall Street Journal reports that activity in $100 call options for oil delivered in December 2022 is unusually active. The price would not come even close to the peak price of oil, reached in 2008. In April of that year, West Texas Intermediate (WTI) reached $150.63 a barrel. It plunged to $52.63 in January 2009.

One reason oil prices may rise much higher is the expectation that the global economic recovery from the COVID-19 pandemic will be at record levels. For example, U.S. gross domestic product has risen by less than 3% in the past five years and fell in 2020. Some economists expect it to rise between 6% and 8% this year. It was up 6.4% in the first quarter of this year. Oil demand in America and dozens of other nations will be driven by increased use of fuel in cars and for aviation, as well as a surge in the use of oil byproducts by commercial entities.

Another reason for oil options at $100 is the anticipation of a significant shortage of supply. A senior executive at Russian oil company Rosneft told Bloomberg there will be a large deficit of oil in the near term. That is due in part to the move to clean energy triggering a sharp drop in oil and gas exploration and production investment. If clean energy does not replace fossil fuel use at a rapid pace, oil availability will be too low to make up for the deficit, which could be temporary, even if that deficit is shrinking.

The upward trend in oil prices already has started in earnest. WTI crude currently trades near $69 a barrel, up from $36 in October, an increase of 92%.
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The economic fallout of $100 oil would be tremendous and could, by itself, partially cripple the world economy. One modest example is that gasoline prices in the United States could rise as high as $4.50 a gallon. Many Americans with modest incomes and those who drive frequently would have a dent in their household budgets. Airlines, already in deep trouble because of the sharp decline in pandemic air travel, would face fuel prices they have not had to worry about in years.

While $100 a barrel oil may help some oil producers in the United States, Russia and the OPEC countries, for much of the balance of the world, the effects would be devastating.

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