Volatility levels spiked as the energy complex bid farewell to September. The daily price range on the December Brent contract and front-month WTI contract ballooned to a whopping $3/bbl yesterday. Yet by the close, both crude markers ended the session little changed. The underwhelming finish came amid a flurry of negative price drivers. First and foremost were rumours that OPEC+ is considering releasing more oil to the market to temper the latest upswing in prices. The prospect of $80 oil does not sit well with the producer group given the potential adverse effects on the fragile economic recovery. All the while, the oil market was also pressured by an energetic dollar. The dollar index hit a fresh 2021 high on the back of mounting expectations of an imminent rate rise. Adding to the unease were yet more red flags for the Chinese economy. Factory activity in the world’s second-biggest economy unexpectedly declined last month for the first time since February 2020. And to top it all off, the EU foreign policy chief hinted that stalled talks between Iran and world powers to reinstate a 2015 nuclear deal will resume “soon”. No surprise, then, that the oil price rally has taken a breather of late after topping multi-year highs. That being said, the uptrend is still ensconced. The oil market has the legs to run higher, but as we discuss below, the upside is likely to be limited.

Higher, but only just

By most accounts, September was a positive month for the oil markets. Solid gains were notched across the board. Looking ahead, oil bulls are confident of higher prices heading into the winter months, and rightly so. Global oil demand consumption is expected to extend its recovery to pre-pandemic levels of around 100 mbpd. In short, demand growth will continue to support oil prices through the rest of 2021. However, as with every other sector, there’s a pretty big dichotomy among forecasters regarding the extent of the upside potential.

Flying the flag for the bullish camp is Goldman Sachs. The bank raised this week its end-2021 oil price forecast to $90 a barrel Brent from $80 projected earlier. Others, meanwhile, are less exuberant about the oil price trajectory. A case in point is the latest Reuters price poll. Analysts upped their average 2021 Brent price forecast to $68.87/bbl from a previous estimate of $68.02/bbl. This suggests that oil prices will only see modest gains for the rest of the year. Echoing this sentiment is Platts Analytics. According to its later projections, Brent prices should average somewhere in the upper $70s in October. In other words, oil will struggle to rally significantly from current levels.

The key takeaway from these forecasts is that Brent faces a tough task to find a new home in the 80s. And this is not without good reason. A resurgence in Covid-19 cases is still looming large over the price outlook. What’s more, the global economy is in the grips of supply-chain constraints and elevated inflation trajectories. Add in China’s newfound economic troubles, and this does not leave much upside for oil prices for the rest of the year.

Crucially, a return over $80/bbl will undermine the sustainability of the global economic recovery and therefore demand recovery. Brent prices above $80/bbl might also result in more consumer nations requesting OPEC and its allies to open their production taps faster. Already this week, the Biden administration reached out again to OPEC+ to bring down oil prices as Brent hit $80/bbl. The latest attempt by Washington to flex its diplomatic muscle comes as US gasoline prices rise to the highest they’ve been in seven years.

For now, though, OPEC+ is likely to continue with the scheduled 400,000-bpd production rise when they meet on Monday. Beyond this month, however, a faster ramp-up in OPEC+ production cannot be excluded. Platts Analytics noted that should supply remain severely disrupted, the producer alliance could raise quotas by 800,000 bpd in November. Needless to say, such a move would act as a brake on the price rally.

For all this alarmism, the near-term price outlook remains supportive. The current price trend is one for recovery. Global oil stocks are trending lower and will continue to do so in the year-end period as OPEC+ restricts output. Yet in the eventuality that Brent tops $80 again, it is unlikely to spend much time above this price threshold.  Currently, the energy complex is “buy on the dips” and “sell on the rise” type of market. This should keep oil prices pinned in a relatively tight range over the remainder of the year.