Interview, Statement
Why Oil Prices Are Surging Despite Recovering Supply
- Brent crude is forecast to average $90 by year-end and $80 annually in 2027, with current risks skewed upside due to potential shipping attacks, infrastructure damage, or a persistent risk premium estimated at $27 per barrel.
- A significant downside scenario involving a rapid drop in the risk premium requires a diplomatic solution perceived as unsustainable, whereas moderate risk premium reduction is plausible if conflict does not escalate post-midterms.
- While oil market fundamentals were balanced last month with a fair value of $85 per barrel, recent price increases are attributed to the risk premium rather than fair value shifts.
- Diesel prices are projected to remain well above historical averages due to structural tightness and curtailed Russian output, even if Middle East conflicts resolve, while gasoline prices have further upside potential due to lower starting points and refiner shifts toward diesel and jet fuel.
- Global crude freight rates have surged $20 per barrel over the last year, driven largely by supply chain reorganization costs, which is expected to widen regional price disparities with cheaper crude in the Americas and higher prices in Asia.
- Tightness in crude oil tankers will likely extend to refined product tankers due to vessel shiftability, though broader cargo freight rates for non-oil goods are not expected to be significantly impacted.
- European natural gas prices face significant upside risks this winter due to low inventories and Middle East LNG exports running at roughly one-third of 2025 average levels.
- In a scenario where Middle East flows remain low and an average winter occurs, TTF prices could rise 70% to 150 euros per megawatt hour, reaching triple-digit territory; however, prices are capped at 300 euros per megawatt hour due to a 20% reduction in European demand and increased non-Middle East supply.
- If LNG exports from Qatar improve significantly, TTF prices could decline from roughly 90 euros to 70 euros.
- Copper prices, currently up 35% year-over-year, are expected to rise an additional 10% by the end of next year to reach $15,600, driven by Chinese demand, weak recycled scrap supply, competition between the U.S. and China, and stockpiling ahead of potential U.N. tariffs.
- Industries facing significant financial strain from rising copper prices include data centers, tech firms, defense contractors, electrical equipment manufacturers, car producers, and solar panel producers.
- The structural bull case for gold is supported by central bank purchases occurring at a pace five times the pre-2022 average, with significant upside anticipated in the base case where the Fed completes a rate hiking cycle with a final hike in December.