Crude oil prices are set to rise over the coming months with an increase in demand as the global economy continues its post-pandemic recovery
Industry analyst Wood Mackenzie expects the oil price to continue to rise, and predicts global demand to grow by nearly 6M barrels per day (b/d) in the next 18 months to over 101M b/d in Q4 2022, eclipsing its previous peak in 2019.
Commodities are currently undergoing a bull run as a result of recovering global economies, a weakening dollar and the possibility of an emerging super cycle – a prolonged period of high prices. On 22 June, Brent touched US$75/bbl – a significant increase on its US$25/bbl last March.
As vaccination rates climb and economies emerge from lockdowns, Wood Mackenzie forecasts a global GDP growth of 5% in 2021 with personal mobility pushing the consumption of gasoline and aviation fuel in the US and China.
However, emerging strains of the virus and the slow pace of vaccinations in some major economies may still cause demand issues.
Wood Mackenzie chief analyst Simon Flowers said “growth in oil supply will be a fraction of expected demand growth in 2021. OPEC+ is exercising an abundance of caution to keep the market in balance and avoid surpluses as the economy recovers. Global liquids volumes will increase by just 1.3M b/d this year, whereas we forecast demand to grow 5.9M b/d year-on-year.”
In 2020, OPEC cut oil production by 20M b/d owing to falling demand, but this April agreed to ease production cuts and is delivering an additional 2.1M b/d of supply to the market while non-OPEC volumes (excluding OPEC+ members) are flat for 2021.
Mr Flowers commented that “the challenge come July is what to do with the 5.8M b/d of supply OPEC+ is holding off the market, as well as the nearly 1M b/d by end-2021 from possible Iranian exports, should the US-Iran talks underway in Vienna lead to a lifting of oil sanctions.”
Iran, a major OPEC producer, currently cannot export a significant portion of production due to US-imposed sanctions following then US President Trump’s decision to withdraw from the Iran nuclear deal.
Global inventories are also in steep decline. OECD inventories are already 100M barrels below the May 2020 peak and Wood Mackenzie’s Macro Oils Service expects this will fall by another 100M barrels by the end of this year to well below pre-pandemic levels.
Traders (like Trafigura) and executives at oil firms are bullish on the prospect of increasing prices. This week Total chief executive Patrick Pouyanne, speaking at the Qatar Economic Forum, said prices could reach US$100/bbl, a view echoed by Bank of America which thinks an ease in travel restrictions will drive demand.
While BP chief executive Bernard Looney said the high prices have helped shareholder returns while improving the company’s cash flow. The company is pivoting from oil to other forms of energy.
With demand increasing, there is potential for price squeeze, with OPEC+ withholding its oil from the market.
Mr Flowers concluded, “Much depends on the strategy of OPEC+, since these barrels can readily be put back into the market. But there’s a limit as to how long OPEC+ can risk playing that game. Higher prices could dampen the global economic recovery. Moreover, the wider industry is also generating huge amounts of free cash flow at US$70/bbl.”
“The next stage will be about OPEC+ selling more barrels and gaining market share as US supply returns to growth. That will likely put a dent in the price but only a moderate one – we expect Brent to average US$66/bbl in 2022.”
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