Oil Market Turnaround, Improved Fundamentals More Likely In 12 To 18 Months
The relative strengthening of crude oil prices in recent weeks – driven by expectations of a global economic turnaround and a marginally weaker dollar – provide ample food for thought about the direction of the market.
At the time of writing (13:56 EST on April 29), the West Texas Intermediate crude oil June contract was up 1.53% or $0.98 to $64.84 per barrel, while the Brent June crude contract was trading at $68.36 per barrel, up 1.62% or $1.09.
For some, a $100 per barrel price level is not that far off. And Goldman Sachs GS -1.3% and UBS have just reiterated their belief in a Q3 2021 price target of $80 per barrel on anticipated strong demand which “supply simply cannot match” to quote one of the aforementioned investment banks.
Clamor on Wall Street is for another 10-14% near-term price upside at a time when a secondary wave of Covid-19 infections is devastating India; the world’s third largest consumer of crude oil after the U.S. and China.
The answer to where the crude price is likely to go in the coming months depends on whom you ask. If supply-side analysis is their primary obsession, you are likely to get a bullish response except from those who believe in the agility of U.S. shale production and haven’t declared it dead. Demand-side permutations and a more pragmatic outlook would point to a gradual price recovery but not a sudden spike anytime soon.
As I have noted before via Forbes, a more holistic recovery is unlikely to arrive before late Q3 or early Q4 2021 regardless of what impatient bulls tell you. To quote, Elena Nadtotchi, Senior Vice President at rating agency Moody’s MCO -1%:”Pent-up consumer demand and increasing trade and manufacturing activity as the Covid-19 pandemic is brought under control are driving a rebound in global economic activity. This, in turn, is quickening the pace of a recovery in demand for oil and gas through late 2021 and into early 2022.”
It’s the latter bit of the comment that’s key here. Nobody is negating a turnaround, and Moody’s itself has changed its outlook for the oil and gas industry to ‘positive’ from stable.
But the turnaround in the fundamentals should be pegged for the next 12 to 18 months, because quite simply there are too many moving parts in the demand dynamic to consider over the near-term, and that to assumes that supply remains constant despite rising prices.
For its part, Moody’s has maintained its medium-term price ranges of $45-$65 per barrel for oil, and $2.00-$3.00/MMBtu for Henry Hub natural gas. The rating agency also estimates that global demand for refined products will rise by about 6% in 2021 and by almost 4% in 2022, albeit from a low base. The overall picture is encouraging and not discouraging.
But successive intraday jumps in the oil price at time when one of the world’s largest crude oil consuming markets is being devastated by a second wave of the pandemic bear all the hallmarks of a premature price bubble which could burst at any time.
Rystad Energy estimates negative oil demand hits of nearly 600,000 barrels per day (bpd) in April and over 900,000 bpd in May, in light of the tragic secondary Covid-19 wave in India. And the analysis firm warns that its negative demand estimates may even prove “conservative” as the current infection trend appears to be grave.
Of course, the eventual hope and expectation is that India will recover and emerge stronger in terms of an economic rebound. This too will feed into a wider recovery for the oil and gas markets. But those pinning their hopes on an imminent turnaround might well be in for a crude shock.