Oil price revisions started off cautiously, with some banks seeing average Brent oil of $ 65 a barrel this year, and others, of a more daring nature, predicted the oil benchmark could rise to $ 65 a barrel. Just a few months ago, these forecasts sounded quite optimistic for the environment, given the slow roll-out of Covid-19 vaccines, continued over-supply of oil and reports of coronavirus variants emerging in various parts of the world threatening new waves of infection. .
Now banks and merchants are talking about Brent at $ 100 a barrel. A major reason for this, of course, is the slump in US oil production following the Texas Freeze earlier this month. In fact, it was bigger than the drop in production from last year’s pandemic, and it will take time to recover – if it ever fully happens.
Still, demand is also steadily recovering in some key markets, particularly China. This recovery has largely offset the slowly recurring demand for oil from other major consumers, such as the United States, and contributed to higher prices.
Then, of course, there are government stimulus in economies around the world in response to the crisis. Trillions of dollars have sunk into businesses and households, in the hope that this will help put GDP back on its growth path sooner rather than later. Again, the US has been critical to the shift in oil sentiment: revisions to oil price forecasts quickly followed President Joe Biden’s proposal to pay a $ 1.9 trillion stimulus package.
The package is still under debate, and it may become smaller than originally suggested. But when it comes to oil, it has done its job. Banks, the Fed, and the Treasury Department all expect a rapid economic recovery as a result of this stimulus, and a rapid recovery will invariably include a revival in demand for oil as people travel more.
Related: Bank Of America Expects Fastest Oil Price Rise in 30 Years
Meanwhile, global oil supplies are declining, even if not all the reasons for this are clear. The Wall Street Journal recently wrote one analysis of the so-called missing barrels, or barrels of oil that somehow slip under the radar of stock trackers, hitting a record high of 68 percent last year from an estimated global inventory increase totaling 1.39 billion barrels. Beyond the mystery of the missing barrels, OPEC + efforts to cut production have been fruitful, and US shale producers have been reluctant to return to a growth mode this time, not least because of oil prices.
In this regard, it is not at all surprising that earlier this week Bank of America, Socar Trading, and Energy aspects all said Brent could rise to $ 100 in the next two years. According to Socar Trading – Azerbaijan’s oil marketing company – prices have risen based on rebalancing fundamentals, and by the summer Brent could hit $ 80 a barrel . As supply remains tight, it could further go up to $ 100 a barrel, the company’s chief trading officer Hayal Ahmadzada told Bloomberg.
Energy aspects Amrita Sen, on the other hand, cited economic incentives as the main reason for the expected price increase.
“It is a futures market, we always give discounts on things that will happen in the future, now. That’s why prices are now rising, ”said Sen, speaking to Bloomberg Surveillance. “We’ve always asked for $ 80 plus oil in 2022. Maybe that’s $ 100 now, given the amount of liquidity in the system. I don’t rule that out, ”she added. Related: Natural gas production fell 45% during the Texas freeze
Of course, expectations of a recovery in demand outside China have yet to materialize, and then there is the issue of additional barrels coming soon from Saudi Arabia, perhaps Russia and probably Iran. With US production still low, they may not immediately affect prices. But a few million barrels a day will certainly put some pressure.
Then there is the latest news from OPEC: the cartel is set to discuss a group increase in production alongside Saudi Arabia, lifting the voluntary 1 million bpd cut from March. However, the increase, if agreed, will be modest at 500,000 bpd. This is the same amount of production that OPEC + brought back online in January, reducing the overall cut by 7.2 million bpd, excluding Saudi Arabia’s unilateral additional cut.
This means that in April the group could pump 1.5 million bpd more than it does now, excluding the possible return from Iranian barrels to the market. This may distort immediate price expectations, but next year the effects of underinvestment in new manufacturing will become more apparent, driving prices higher.
By Irina Slav for Oilprice.com
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