A Slippery Slope: BofA Analysts Just Said Oil Could Go to $250

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As tensions in the Middle East rise, so will the price of a barrel of West Texas Intermediate (WTI) crude oil. At least, that’s the hypothesis proposed by a big-bank analyst firm with an alarmist vision but a compelling argument.

Hardly anyone really needs to be convinced that gasoline prices are high. Filling up one’s gas tank nowadays is enough to turn sticker shock into shell shock.

Yet, this bad situation could get much worse if a recently published oil-price prediction comes to pass. The implications are profound for investors, to be sure, but they may be life-altering for consumers of all walks of life.

Relief at the pumps is coming, but not soon

Before I unleash the shock and awe of a big bank’s stunning petroleum-price prediction, I’ll ease the pain for a moment with the optimistic findings of the International Energy Agency (IEA).

As the IEA sees it, the “momentum behind clean-energy transitions is now sufficient for global demand for coal, oil and natural gas to all reach a high point before 2030.”

However, before you breathe a sigh of relief, note that the IEA expects the share of oil, coal and natural gas in the global energy supply to diminish from around 80% today to 73% by 2030. In other words, the transition to clean energy this decade will be gradual and, to put it bluntly, incomplete.

This doesn’t preclude the possibility of oil-price attrition over the next few years if new-energy vehicles gain wide adoption. Certainly, the lofty price of Tesla (NASDAQ:TSLA) stock seems to express the market’s optimism that vehicles with internal combustion engines (ICEs) will go out of style sometime in the 2020s.

Yet, the prospects of near-term relief at the gas pumps aren’t bright. Declining inventories, combined with Saudi Arabia’s petroleum-supply curbs, prompted Andurand Capital Management LLP founder Pierre Andurand to forecast a triple-digit WTI crude oil price.

“For me, an adjustment likely will come around $110 a barrel. So there’s room to the upside for prices,” Andurand posited.

Andurand’s point is duly noted as Saudi Arabia’s influence over the global supply-and-demand balance cannot be understated.

“The Saudis will have to decide when and at what price to bring supply back,” he explained.

Yet, Saudi Arabia isn’t the only factor, and owing to recent events in the Middle East, it isn’t the focus of the commodities market’s attention right now. As tensions rise and resolution seems remote, Andurand $110-per-barrel oil estimate may actually be on the conservative side.

$250 oil: Can it actually happen?

Getting to $110 is one thing; doubling that figure and then some is another matter entirely. Yet, it’s not out of the realm of possibility, at least according to a group of analysts at Bank of America (NYSE:BAC).

Following the BofA analysts’ argument, oil at $250 per barrel wouldn’t be achieved with a single event. First, oil could surpass $130 if, amid the war between Israel and Hamas, attacks on energy infrastructure caused physical supply disruption.

Next, oil may rise above $150 per barrel if conflict escalation in the Middle East reduced global petroleum supplies by 2 million barrels per day. Finally, if Iran gets more directly involved in the war (beyond the country’s alleged support of Hamas) and the U.S. retaliates, the oil price could break above $250.

That last piece of the puzzle requires a bit of clarification. U.S. retaliation against Tehran could make it difficult or impossible for petroleum-carrying vessels to pass through the Strait of Hormuz; this is considered an essential Middle Eastern passageway for the world’s oil supply.

Moreover, even if that channel isn’t blocked, the BofA analysts still envision a perilous path to $250 for oil.

“While keeping the Strait of Hormuz open is key to oil market stability because 17mn
barrels cross it every day and prices could spike above $250/bbl if it shuts down for an extended period of time, there are plenty of other energy choke points,” the analysts warned.

Possible vs. probable

Consequently, oil at $250 per barrel is possible. However, in the BofA analysts’ thought experiment, a number of worst-case scenarios would have to play out in full. I suspect that such a crisis is unlikely.

Besides, as the old saying in the commodities market goes, the solution to high prices is high prices. Oil at $150, not to mention $250, shouldn’t last long as it would precipitate panic pumping among domestic and international drillers in a mad quest for “black gold.”

That’s what I’m hoping would happen, at least. Thus, if you invest based on probabilities instead of mere possibilities, it’s fine to leave your current portfolio strategy as is. Otherwise, you may end up disappointed as the days turn into weeks, the weeks turn into months, and contrary to the experts’ assessments, the world somehow doesn’t come to an end.