Oil price analysis: demand recovery to support the market

Members of the Organisation of the Petroleum Exporting Countries (OPEC) agreed in a meeting on 18 July to “adjust upward their overall production by 0.4 million barrels/day on a monthly basis starting August 2021”. This will add an additional two million barrels a day by the end of 2021.

Oil producers at OPEC+ (OPEC members plus 10 additional oil exporting countries) will assess market developments in December before establishing output policy for 2022.

Many analysts remained moderately bullish on oil prices for 2021 and 2022, despite an agreement between major oil producers to increase monthly production from August onwards.

The latest oil price overview: what’s been happening to the market?
OPEC’s limits on oil output since April have boosted prices. WTI oil gained 57% in the first half of this year, trading at $76.38 a barrel on 5 July. In the meantime, a barrel of Brent Crude gained 53% in the first six months of 2021, before peaking at a 30–month high of $77.47 on 6 July.

However, following OPEC’s announcement, market concerns on rising supply amid recovering global demand owing to the COVID-19 pandemic pulled oil prices lower. On 19 July, prices dropped – WTI oil prices fell to $65.47 a barrel and Brent Crude to $67.37 a barrel.

Despite the dip, the oil prices trend has remained relatively firm, with Brent Crude maintaining 18–month highs.

With the Delta COVID-19 variant spreading across the world, the market is wary that any spike in infection rates could hit demand.

Societe Generale said in June’s quarterly report: “We think we could be back to a ‘normal’ year at the end of the year in terms of previously recorded values, but the entire oil market is still far from being back to normal. GDP growth has increased oil and product demand, but jet fuel demand will remain an issue although this is showing signs of normalisation.”

According to an ANZ report of 19 July, “mobility data are encouraging for oil demand, despite concerns around surging Delta variant cases in some countries. The northern summer travel season saw US flight passenger numbers rising to 2.2 million.”

While uncertainties over the direction of the oil price chart persist, the crude oil price forecast from most analysts remained above $60 a barrel. For instance, US investment bank Goldman Sachs appears unmoved by increased OPEC output and rising COVID-19 cases, reiterating in July its $80 a barrel price forecast for Brent crude.

Despite negative news, market expectations are that oil prices are unlikely to collapse to the negative prices recorded in April 2020 in the US.

As governments across the world imposed lockdown and closed borders to slow the spread of coronavirus, oil demand crashed. To further compound the situation, Russia and Saudi Arabia failed to reach a consensus on oil production, leading to a price war in March 2020. As countries eased lockdown by mid-2020, oil prices began to rebound, and OPEC agreed to cut production.

See table below for expected oil prices in 2021-2022.

As for WTI crude oil, check out this video in which David Jones, Capital.com’s chief market strategist, uses US oil price technical analysis to help you better navigate the market.

Strong demand and drawn down inventories to support prices
Global oil demand is widely expected to recover from last year as the vaccination programme progresses. Societe Generale expects oil demand to rise to 96.3 million barrels a day in 2021, up 5.8% on the previous year. The bank said in its quarterly report that “perhaps total demand should have been closer to 101.8mb/d in a world without COVID-19”.

Lower oil inventories indicate rising demand. Seasonal inventories for both crude and petroleum products within the Organisation for Economic Co-operation and Development (OECD) are below the averages for 2015-2019.

Potential downside

However, in the event of non-compliance over OPEC’s output policy, oil prices could fall. Existing oil price predictions by many analysts are based on the planned oil output agreed by OPEC+ members. If any member decides not to comply, oil production could rise, leading to lower prices.

If cooperation among OPEC+ members fails, “each country will, as in March 2020, again produce at its own discretion. Oil production will increase rapidly and oil prices will fall sharply (30% probability),” said Dutch bank ABN AMRO in early July.

Societe Generale said in its quarterly report that a breakdown in compliance among OPEC members is possible, “which tends to happen when demand recovers, supply is weaker, and inventories are normal.” If this happens, oil prices could fall to $50 a barrel.

In addition, Iranian crude exports could return to the market if the US lifts sanctions imposed on the country. This will add to the oil supply, which is likely to affect prices.
Source: capital.com