Oil prices could transfer “a lot higher” from present ranges given the world’s deep reliance on fossil fuels and will hit $150, says Christopher Wood from Jefferies.
“In a world that really reopens — which is a big ‘if’ — the oil price can go significantly higher,” Wood, international head of fairness technique on the funding financial institution, informed CNBC’s “Street Signs Asia” on Wednesday.
“Oil got to over $80 with a lot of Asia closed,” and China’s borders are successfully nonetheless closed, he stated, in reference of Beijing’s strict zero-Covid method. “In a really fully reopened world, the oil price could go to a $150 dollars because the supply constraints are dramatic.”
The “political attack” on fossil fuels in latest years has eliminated the motivation for funding in the sector regardless of its lingering significance, the strategist stated, declaring that 84% of world’s vitality demand final 12 months was met by fossil fuels.
“The issue for me is not the oil price, the issue is the pandemic. The oil price is gonna go higher in a fully reopened world because nobody’s investing in oil but the world still consumes fossil fuels,” he stated.
“So oil can go much higher and that can definitely escalate an inflation scare,” Wood stated.
On Wednesday afternoon throughout Asia’s buying and selling hours, worldwide benchmark Brent crude futures had been at round $71.90 per barrel whereas U.S. crude futures had been at about $68.50 per barrel.
Oil noticed its worst day of 2021 on Friday amid a international market rout, triggered by the World Health Organization’s Thursday warning concerning the omicron Covid variant. Oil prices have seen wild swings between optimistic and destructive territory since, as buyers search readability on the financial impression of the newly recognized variant that has way more mutations than earlier strains.
“To me, the only thing that’s really gonna knock the oil price down is new lockdowns in the Western world, which is why oil corrected when we saw the news about the new variant,” Wood stated.
Investor sentiment globally stays fragile because the new Covid variant was recognized.
Inflation outlook and the Fed
Looking forward, Wood predicted that inflation will doubtless find yourself structurally greater than the place it was earlier than the pandemic.
There could be extra volatility forward barring any “really negative outcomes” on Covid, at the same time as vaccination efforts ramp up, he stated.
The expectation of upper structural inflation forward implies that markets might be on the mercy of tightening and tapering scares, Wood defined: “It really comes down to how hawkish the Fed is really going to be.”
U.S. Federal Reserve Chairman Jerome Powell stated Tuesday the central financial institution could finish its bond-buying program sooner than initially deliberate because the nation combats rising inflationary pressures. That could open the door for the Federal Reserve to increase rates of interest earlier, although Powell harassed the tapering shouldn’t be considered as a sign of looming fee hikes.
“Personally, I believe … the Fed will talk a more hawkish game than they act,” Wood stated. “In my view, they will fundamentally remain dovish.”
“If they suddenly decide to start tightening in a meaningful fashion, which is a big if. But if they do, then I believe markets will go down sharply,” the Jefferies’ strategist stated.
“I continue to believe that any kind of risk off move, the Fed will back off its tightening very quickly and move more in the direction of financial repression — by which I mean further severing the links between inflation and interest rates,” Wood stated.
— CNBC’s Elliot Smith and Jeff Cox contributed to this report.