Oil is rising, 7 factors that could accentuate the rise...or cause it to fall

Oil prices soared last week to highs not seen in two months. On Wednesday, Brent hit $84 a barrel and WTI climbed to near $82 a barrel.

Here are some factors behind this rise and an overview of what could move prices in the short term.

What is pushing oil prices up?

1. Inflation

The Labor Department revealed this week that the inflation rate in the United States reached 7% in December. The U.S. CPI has topped the 6% level for three consecutive months, making it the fastest inflation growth since 1982.

As this column has already discussed, inflation acts as an upward force on oil prices. Although the Federal Reserve has admitted that interest rate hikes and tighter monetary policies are needed to curb inflation, monetary policy changes are unlikely to be made before March at the earliest.

Many believe that even if it acts, the Federal Reserve will not make the aggressive interest rate hikes needed to truly bring inflation under control. They think the Fed is afraid of dragging the economy into a recession.

Comments from Fed Chairman Jerome Powell on Wednesday helped fuel higher oil prices when he said interest rate hikes would not come at the expense of economic growth. Analysts took this to mean oil demand would remain strong, but inflation would likely continue to affect oil prices.

2. Sluggish OPEC production growth

OPEC+ has maintained its commitment to increase its oil production quotas by 400,000 bpd each month. However, monitoring by outside sources has revealed that the group does not, in fact, add as much oil to the market each month.

A recent study by Platts found that in December, OPEC+ only increased production by 310,000 bpd. Fourteen of the 18 members that have quotas (Iran, Venezuela and Libya are exempt) did not meet their numbers in December. OPEC+ is supposed to increase production by another 400,000 bpd in January and recently authorized a 400,000 bpd increase for February as well, but it's unclear whether the group can or will meet those production targets.

3. Omicron fears fade

In December, the discovery of a new variant of the coronavirus, Omicron, sent oil prices plunging as market watchers feared further holiday season shutdowns and travel restrictions could hurt oil demand. Even though many regions are reporting high numbers of coronavirus cases, fears of travel restrictions appear to have dissipated.

As a result, oil demand is again expected to be strong. This is helping to push prices higher, although data on whether consumption is still affected by Omicron fears is yet to come.

4. Unrest in Kazakhstan

Political unrest in Kazakhstan, which produces 1.68 million bpd, caused a brief interruption in the supply of oil from a field earlier this week. Oil prices have been supported this week by news and uncertainty surrounding political and social unrest, although we can expect this sentiment to dissipate if Kazakhstan does not become a major international news item.

What to watch out for:

1. OPEC+ production in January

Will we see strong OPEC+ production growth in January? All eyes will be on Russia, Saudi Arabia, the United Arab Emirates and Iraq to see how much these producers will increase their production. Producing their full quotas could help dampen prices, although Nigeria and Libya continue to fall short.

2. Petrol consumption in the United States

Preliminary data shows that gasoline consumption in the United States fell in January. According to GasBuddy, gasoline consumption on January 10 was at its lowest level in 10.5 months. Gasoline demand for Monday, January 11 was down 1.5% from the previous Monday and 7.8% from the average of the past four Mondays.

Operators should keep an eye on these numbers as the drop in gasoline demand could show up as a build-up of gasoline in EIA data later in the month.

3. Geopolitical considerations

Diplomatic negotiations are on-going between the United States and Iran and between the United States and Russia. Little progress has been made so far with Iran, but as President Biden's approval ratings continue to decline, his administration may adopt a more conciliatory stance toward Iran in order to secure a "victory in foreign policy" before the midterm elections.

This could include some kind of sanctions relief that would allow more Iranian oil to come to market. Talks began this week between the United States and Russia regarding Russian threats in Ukraine. Oil prices could move lower or higher depending on whether the news is positive or negative, and so far the talks don't look promising.

Saisi