After having gone back and forth in recent weeks, oil prices seem to have settled around $70/bbl. Many would argue that this is a Goldilocks situation, that is one in which the oil price doesn’t risk demand destruction and one that isn’t too low that it disincentivizes production. Will prices stay at their current sweet spot? The EIA seems to think so. In its latest report, released last week, it said it expects Brent to remain near current levels for the remainder of the year. Echoing this sentiment is Société Générale. The French bank said it sees Brent averaging $70/bbl in 4Q21 under its base-case scenario.
Others, meanwhile, expect prices to trend higher in the year-end period. Leading from the front is Goldman Sachs which is still banking on Brent hitting $80/bbl before the end of the year. This is in spite of big oil consumers expressing discomfort at the thought of $80 oil. On the flip side, some believe that we are on the cusp of a leg lower in oil prices. In a recent weekly research report on the oil market, Mitsubishi UFJ Financial Group forecast that Brent would end the year at $64/bbl.
Whether the oil market jolts in one direction or the other remains to be seen. In the meantime, it is worth looking at some factors that will play an important role in the formation of prices in the final third of 2021. In the bullish corner, crude demand in China has started showing signs of recovering. After four months of lacklustre imports, the intake of foreign crude by the world’s biggest importer of the commodity scrambled back above 10 mbpd in August. What is more, the broader global oil demand picture is showing signs of normalising on the back of rising mobility trends. The upshot is that the world’s thirst for oil is edging closer to a pre-pandemic level of around 100 mbpd.
Meanwhile, on the supply front, as OPEC+ is firmly in control of supply, and maintaining its cautious stance, the crude market should continue to tighten further in the year-end period. All the while, stagnant recovery in US output in the Gulf of Mexico also ought to lend support to prices. More than two weeks have passed since Hurricane Ida wreaked havoc on offshore oil installations and three-quarters of production remains shut. There is no telling when production will make a full recovery. What is becoming obvious is that refiners that are recovering faster from the natural disaster faster than oil producers are in frantic search of supply. Such is the current shortage of available crude oil that it is economic to look as far as Russia in their attempt to secure crude oil cargoes. Traders are planning to ship Urals crude oil over the US for loading September. Ida’s work is genuinely felt in Europe where Mediterranean Urals discount to forward Dated Brent has narrowed to around $1/bbl from below $2/bbl pre-hurricane, Platts data shows.
In the bearish corner, first and foremost is – you’ve guessed it – pandemic dynamics. Although the current Covid-19 situation is not threatening the reduction in global oil stocks, a winter spike in cases and subsequent lockdowns would depress oil prices. Another potential downer could come courtesy of the US shale comeback. Offshore US crude production may be currently crippled, but onshore tight oil supply growth is accelerating. US shale oil output is expected to rise to 8.1 mbpd this month, the highest since April 2020. Moreover, additional gains are pencilled in for the coming months and beyond as US energy firms ramp drilling activity. The latest Baker-Hughes estimate saw US rig counts jumping to 401, a weekly rise of 7. Staying in the US, the prospect of a perky dollar may also act as a drag on rallying oil prices. A looming announcement from the Fed that it will start tapering its asset-buying program later this month will likely support the dollar, and in turn pressure oil prices.
All in all, a myriad of push and pull factors are currently confronting the oil market. Consequently, oil prices may not have much room to rise in the near term, but at the same time are not expected to crash soon. In other words, pricing pressures should stay delicately poised for the remainder of the year thereby keeping oil prices in a tight range. This will be music to the ears of OPEC and its allies. Last week, the head of Russia’s Lukoil gave the market an important signal, namely that the OPEC+ alliance favours keeping oil prices in the range between $65/bbl and $75/bbl.
OPEC, the IEA and Norway
Call it Golidlocks, short-term equilibrium or uncertainty oil prices are currently relatively static. Weekly changes were miniscule and Brent, for example, set its weekly range on Thursday. After the EIA released its monthly amendments on the global oil balance last week, we will have the OPEC and the IEA findings to deal with today and tomorrow. Unnamed OPEC sources told Reuters that that it will likely cut its 2022 demand forecast in today’s report as its latest growth prediction of 4.8 mbpd from the beginning of the month now looks overoptimistic. It would be another proof of the nightmare forecasters are facing when trying to look for demand patterns when consumption is close to impossible to predict.
It will also be worth casting our eyes to Norway today. Although it will not have an immediate impact on the oil balance, this week’s “climate election” could alter the general view about the transition from fossil fuel to renewables. The political spectrum is polarized. The Green party, which has been gaining popularity of late promises an immediate stop to oil exploration and a halt to oil production by 2035. On the other end of the spectrum are the Labour and Conservative parties who support the country’s oil industry arguing that denting oil demand is the right way to tackle climate change and hasten transition. Although peak oil demand, energy transition and the best way to deal with global warming is fiercely debated and will be for years and decades to come one thing is sure: the process in irreversible.