We have seen stronger movements in the main crude oil benchmarks – WTI and Brent, in the last few months. This was initiated by the positive news on the Covid front that developing vaccines were extremely effective, promising an end point for the spread of the virus. This upward trend in crude oil was stimulated by the gradual decline in US shale production and inventories over the same period.
EIA data, chart by author
Finally, the early January move by OPEC + to curb production in mid-2021 and an additional “gift” from Saudi Arabia to remove another 1 million BOPDs from the market, gave WTI the impetus to grow. firmly in the $ 50s. In this article, we will discuss the main reasons why we believe that the upward trend in crude oil will continue this year. Why?
The request will return
Despite current blockages that inhibit demand, the trend is higher. As the implementation of vaccines increases the reserve of the population immune to the virus, commercial activity will resume creating demand for refined petroleum products. The chart below shows the EIA, the Energy Information Agency, forecasting the trend of refined products over the next few years. For gasoline, the main engine fuel used in the US is gradually moving higher in the second half of 2021 and then moderating in 2022, just below 2019. EIA makes some assumptions about working from home and reducing travel in this forecast. The forecast is not so robust for aircraft fuels, showing a slight increase in 2021, but a return to levels close to 2019 in 2022. Total demand increases and slightly exceeds the levels from 2019 to 2022. Related to this: The pandemic could lead to a major oil supply crisis
This is optimistic about oil prices.
The political and macro environment will push supply less
Elections have consequences. The concentration of power over the next few years, with Democrats controlling all three branches of government, is very unlikely to increase US production. Since the last highs in 2020 when the US produced more than 13 mm BOPD, production in response to low prices has fallen to 11.0 mm BOPD. We will see an even stricter regulatory environment in the coming years. The US will be firmly placed on a path in which renewable fuels are raised at the expense of petroleum-based fuels. The early re-entry of the US into the Paris climate agreements will only exacerbate this trend. Fossil fuels will become fewer and this is optimistic about prices.
OPEC + surprised the world with its determination to finally raise prices. Using its power as one of the world’s top three crude oil producers and its undisputed position as the world’s lowest-cost producer, Saudi Arabia has unilaterally chosen to withdraw another 1 million BOPDs from global markets beyond its OPEC + commitments. . This move has moved oil markets above $ 50 for the first time since early March 2020. What strongly suggests is that the cartel is resuming its traditional role of setting crude oil prices for the world.
The decline in US supplies will firmly bring back pricing power to OPEC +. The recently obtained $ 50 handle will probably be a minimum price in the future. The glut we have been dealing with in recent years will continue to dissipate, as the retention of capital by American shale producers maintains the general downward trend. OPEC + really has a single mission, which offers maximum profitability to its members by balancing supply and demand. The current passion of Western economies for climate change is less of a motivator for the key OPEC + countries. Their savings are primarily driven by crude oil exports and everyone wants higher prices.
OPEC + resumption of the role of swing producer is optimistic about oil prices.
Commodity prices will rise
Last fall I wrote a Article on the price of oil where I argued that there could be a goods boom on the horizon. There is no commodity that is more fundamental to the world economy than crude oil. Among the things that stimulate crude oil, apart from the shortage, is the fact that it is priced in dollars, which makes it very susceptible to inflationary pressures.
MarketWatch
The dollar index has fallen in the last year, but has recently seen support with a week-higher trend. A stronger dollar is optimistic about oil prices because you get less oil for the dollar, which means you have to spend more of them to get the same amount. This is inflationary and, as mentioned above, crude is very susceptible to this pressure.
About: Saudi Arabia begins new Middle East oil bullfight
Nor can we ignore the amount of stimulus that the global economy has triggered in response to the virus. We believe that as the infection rate declines, governments will begin to address historically low interest rates, which have helped ensure liquidity in the pandemic. There is a price to be paid for the cash wave distributed so far, and the additional stimulus that will come as the Biden administration takes control of the economy. Classical monetary theory tells us that part of the price is probably inflation.
There is a temptation to compare this crisis with the financial crisis of 2008. There, the Treasury borrowed about $ 500 billion to provide liquidity that prevented the collapse of the financial system. So far in the US alone, incentives worth nearly $ 4 trillion have been authorized, with other actions being taken by the Federal Reserve to ensure that institutions, corporations and small businesses have the funds they need to operate. As mentioned earlier, the Biden administration is just getting started and has discussed several trillion financial incentives for the economy.
Marketwatch
Commodity prices rose sharply between 2008 and 2011 in response to the stimulus provided in response to the financial crisis of 2008. The same index below shows that the index has risen sharply over the last six months. This increase is certainly linked to the amount of incentives offered and expected to be provided by the global economy.
Marketwatch
As mentioned earlier in this article, crude oil is the most fundamental and volatile of commodities.
An environment of rising or sharply rising commodity prices is strongly conducive to higher oil prices.
Your takewayway
Brevity prevents us from discussing all the factors that could have an impact on oil prices in the short term. With the information provided in this article, we believe that this is a strong case for a moderate continued rise in oil prices for the rest of this year.
In the longer term, we expect an increase in crude oil prices, as declining supply fails to meet growing demand. We consider this to be inevitable, as we mentioned in a previous post Article on the price of oil. Insufficient investment by key international oil companies over the past six years will create a scenario in which the industry simply will not be able to meet the growing demand in a timely manner.
By David Messler for Oilprice.com
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