By the end of this year, Brent crude could hit $ 70 or even $ 80 a barrel, says a hedge fund manager. An energy analyst’s forecast could exceed $ 100 next year. The oil is in tears and suddenly everyone is up. But this is probably the most fragile recovery in oil prices in history. Something as small as a virus could kill him.
Effective immunity is the big factor for hedge funds, according to a recent Reuters report. According to them and several banks, the United States – the world’s largest oil consumer – will reach the herd’s immunity by the middle of the year, which will coincide with the summer driving season for the benefit of oil producers.
“By summer, the vaccine should be widely and timely offered for summer travel, and I think things will go to gangbusters,” a hedge fund manager, David D. Tawil of Maglan Capital, told Reuters.
Government incentive will also help. In fact, it could even raise prices to $ 100 or more, according to Amrita Sen.
“I always asked for $ 80 plus oil in 2022. Maybe now it’s $ 100, given how much liquidity there is in the system. I wouldn’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, overall sentiment is positive.
However, there are a few flies in the stimulant ointment. In Europe, some analysts warn that government support for businesses is creating so-called zombie companies that will collapse when the stimulus ends, which they will eventually have to do. In the United States, some analysts have questioned the need for President Biden’s $ 1.9 trillion stimulus program, saying the economy is already growing, however slowly, and a stimulus package as large as this. could lead to excessive inflation, which could have unexpected consequences.
And then there are oil producers, many of whom have struggled to stay afloat since the pandemic hit the global stage. As oil prices rise, the fight will end, but it will also tempt many to start producing more, especially as demand recovers due to mass vaccinations.
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This is the dominant expectation: that by summer, there will be enough people vaccinated for life to start returning to normal, including in demand for oil. Analysts and financiers note that oil companies are much more concerned about rising production this time around and will stop returning to growth for longer. This may or may not be the case, but what most analysts and funders seem to rule out is the possibility of a recurrence of Covid-19 infections.
It is not a thought that many would easily entertain, not after the months of deadlock and travel restrictions that have decimated air travel and oil demand. However, senior medical experts, such as the director of the US Centers for Disease Control, are warning that new variants of the coronavirus that caused the pandemic could indeed lead to new increases in infections. These variants appear to spread faster than the original virus, doctors said, but the bigger problem is that the vaccines we have available may not be effective against them.
“They’re more virulent, they can cause more deaths, and some of them can even get rid of the immune response, whether it’s natural or vaccine,” said Dr. Celine Gounder, a member of the Biden-Harris Transition Covid Advisory Committee last week.
That is all that would be needed for oil price forecasts to collapse and burn: another resurgence of cases and the news that available vaccines are not working against new variants of the virus. It is possible that this risk will make producers so unusually cautious about their return to increased production. This precaution, combined with OPEC + ‘s continued cuts, would likely limit the negative potential of oil for a while, even as new Covid-19 cases begin to grow again in any of the largest oil markets. Related: Oil prices recorded the longest winning streak in two years
Interestingly enough, the hedge funds interviewed by Reuters do not seem to influence the shift to renewable energy, which is expected to permanently decrease oil demand. On the contrary, despite many of the government’s green transition plans, financiers expect a bright future for oil, not just this year and the future.
“Oil companies are likely to return for the first time in a long time,” Jean-Louis Le Mee, head of hedging fund Westback Capital Management, told Reuters. “We have all the ingredients for an extraordinary oil bullfighting market in the next few years.”
It is an interesting situation: governments and environmental groups are working to get less oil and more renewable sources as soon as possible, supporting the reduction of solar and wind costs and the progress made. Oil traders, on the other hand, expect a strong enough recovery in demand to raise prices to where they were before the pandemic and before all these energy transition plans were announced. It would be fascinating to watch who gets it right.
By Irina Slav for Oilprice.com
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