Brent crude oil could hit $ 70 or even $ 80 a barrel by the end of this year, a hedge fund manager says. It could reach more than $ 100 next year, an energy analyst predicts. Oil is on a tear and suddenly everyone is optimistic. But this is probably the most fragile oil price recovery in history. Something as small as a virus could kill it.
According to a recent report from Reuters, herd immunity is the most important factor for hedge funds. According to them and several banks, the United States – the world’s largest oil consumer – will achieve immunity to herds by the middle of the year, coinciding with the summer driving season in favor of oil producers.
“By the summer, the vaccine should be distributed widely and just in time for summer travel, and I think things are going to be gangbusters,” a hedge fund manager, David D. Tawil of Maglan Capital, told Reuters.
Government incentives will also help. In fact, according to Amrita Sen of Energy Aspects, it could push prices up to $ 100 and above.
“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, ”Sen told Bloomberg this week.
Central banks and governments have been more than generous with incentives to deal with the effects of the pandemic crisis, and while some are skeptical about the long-term benefits of some measures, the general sentiment towards them is positive.
However, there are some flies in the stimulus ointment. In Europe, some analysts are warning that government support for companies is creating so-called zombie companies that will collapse when the stimulus ends, which will eventually have to happen. In the United States, some analysts have questioned the need for the President’s $ 1.9 trillion Biden stimulus program, saying that the economy is already picking up, however slow, and that such a large stimulus package could trigger to excessive inflation, which can have unexpected consequences.
And then there are the oil producers, many of which have struggled to survive since the global pandemic hit. Soaring oil prices will end the battle, but it will also tempt many to increase production, especially as demand recovers thanks to massive vaccinations.
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This is the predominant expectation: by summer, enough people will be vaccinated for life to return to normal, including in terms of oil demand. Analysts and financiers note that this time around, oil companies are much more cautious about output growth and are waiting longer to return to growth mode. This may or may not be the case, but what most analysts and funders seem to ward off is the possibility of a resurgence of Covid-19 infections.
It’s not a thought that many would easily harbor, not after the months of lockdowns and travel restrictions that have decimated both air transport and oil demand. Still, medical experts in senior positions, such as the director of the U.S. Centers for Disease Control, warn that the new variants of the coronavirus that caused the pandemic could indeed lead to new spikes in infections. These variants seem to be spreading faster than the original virus, medics have said, but the bigger problem is that the vaccines we have available may not be effective against them.
“They are more virulent, can cause more death, and some of them can even escape the immune response, be it natural or through the vaccine,” said Dr. Celine Gounder, member of the Biden-Harris Transition Covid Advisory Board last week. .
This is all it takes to crash and burn bullish oil price forecasts: another resurgence in cases and the news that available vaccines are not working against the new virus variants. It could be this risk that makes producers so unusually reluctant to return to production growth. This caution, coupled with OPEC + ‘s ongoing austerity, would likely limit oil’s downside potential for a while, even if new Covid-19 cases start to pick up again in one of the largest oil markets. Related: Oil Prices Record Longest Winning Streak in Two Years
Interestingly, the hedge funds interviewed by Reuters don’t seem to account for the shift to renewable energy that is expected to push oil demand permanently. On the contrary, despite a government’s many green transition plans, financiers expect a bright future for oil, not just this year and next.
“Oil companies are likely to make a major comeback for the first time in a long time,” Jean-Louis Le Mee, head of hedge fund Westback Capital Management, told Reuters. “We have all the ingredients for an extraordinary bull market in oil for years to come.”
It’s an interesting situation: governments and environmental groups are pushing for less oil and more renewable energies as soon as possible, touting the declining solar and wind costs and breakthroughs in storage. In contrast, those trading oil expect a recovery in demand strong enough to push prices back to where they were before the pandemic and before the announcement of all these energy transition plans. It would be fascinating to see who is right.
By Irina Slav for Oilprice.com
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