We have seen strong higher movements in the main crude oil benchmarks – WTI and Brent, in recent months. This began with the arrival of 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 driven by the gradual decline in U.S. slate production and inventories over the same period.
Data-EIA, graph by author
Finally, the OPEC + measure in early January to restrict production in mid-2021 and an extra “gift” from Saudi Arabia to remove another million BOPDs from the market, prompted WTI to push for increase firmly to $ 50. In this article, we will look at the key reasons we believe the upward trend in crude oil will continue this year. Because?
Demand will return
Despite current blockages inhibiting demand, the trend is higher. As the implementation of vaccines increases the entire population immune to the virus, business activity will resume creating demand for petroleum products. The following graph shows the forecast of the EIA, Energy Information Agency, of the trend of refined products over the next two years. For gasoline, the main engine fuel used in the U.S. gradually increases in the second half of 2021 and then moderates in 2022, just below 2019 levels. The EIA makes some assumptions about the work since home and reduces travel in this forecast. The forecast is not as robust for jet fuels, showing slight growth in 2021, but a return to levels close to 2019 in 2022. Total demand increases and slightly exceeds 2019 levels in 2022. Related: The pandemic could cause a major oil supply crisis
This is bullish for oil prices.
The political and macro environment will reduce supplies
Elections have consequences. The concentration of power over the next two years, with Democrats controlling all three branches of government, will make increases in U.S. production very unlikely. Since the recent highs of 2020, where the U.S. produced BOPDs of more than 13mm, production in response to low prices has dropped to 11.0mm of BOPDs. We will see an improved and stricter regulatory environment in the coming years. The United States will stand firm on a path where renewable fuels increase at the expense of petroleum-derived fuels. The planned re-entry of the United States into the Paris climate agreements will only aggravate this trend. Fossil fuels will be scarcer, and that is bullish for prices.
OPEC + has surprised the world with its decision to finally raise prices. Using its strength as one of the world’s top three producers of crude oil and its undisputed position as a world low-cost producer, Saudi Arabia unilaterally chose to withdraw another million BOPDs from world markets beyond its commitments to OPEC +. This action pushed oil markets above $ 50 for the first time since early March 2020. What this strongly suggests is that the cartel resumes its traditional role of setting crude oil prices for the world.
The decline in US supplies will return the power of prices to OPEC +. The recent $ 50 handling is likely to be a minimum price in the future. The excess we have had to deal with in recent years will continue to dissipate as the capital constraint of U.S. slate producers maintains the general downward trend. OPEC + really has only one mission: to provide maximum performance to its members by balancing supply and demand. The current fondness of Western economies for climate change is less a reason for the key countries that make up OPEC +. Their economies are driven primarily by crude oil exports and they all want higher prices.
OPEC + resuming the role of swing producer is bullish for oil prices.
Commodity prices will rise
Last fall I wrote one Article on oil prices where I posed that there would be a commodity boom on the horizon. There is no commodity more fundamental to the world economy than crude oil. Among the things that drive crude oil other than scarcity is the fact that it is priced in dollars, which makes it very susceptible to inflationary pressures.
MarketWatch
The dollar index has declined over the past year, but has recently seen support with a trend over the week. A stronger dollar is bullish for oil prices, as you get less oil for the dollar, which means you have to spend more to get the same amount. This is inflationary and, as noted above, crude oil is very susceptible to this pressure.
Related: Saudi Arabia launches new bullfight in the Middle East
Nor can we ignore the amount of stimuli the world economy has triggered in response to the virus. We think that as the infection rate begins to decline, governments will begin to address the historically low interest rates that have helped provide liquidity in the pandemic. There is a price to pay for the tide of cash distributed so far, and the additional stimulus to come as the Biden administration takes control of the economy. Classical monetary theory tells us that part of the price is likely to be inflation.
There is a temptation to compare this crisis with the financial crisis of 2008. There, the Treasury borrowed about $ 500 billion to provide the liquidity that prevented the collapse of the financial system. So far in the United States alone, nearly $ 4 trillion in incentives have been authorized, with other Federal Reserve actions to ensure that institutions, businesses, and small businesses have the funds to operate. As noted above, the Biden administration is just beginning and has debated trillions more of financial stimulus for the economy.
Marketwatch
Commodity prices rose sharply between 2008 and 2011 in response to the stimulus provided in response to the 2008 financial crisis. The same index below shows that over the past six months the index has risen sharply. This increase is undoubtedly related to the amount of stimuli provided and projected for the world economy.
Marketwatch
As noted earlier in this article, crude oil is the most fundamental and volatile commodity.
An environment of rising or rising commodity prices is strongly bullish for higher oil prices.
Your takeaway
The brevity prevents us from discussing all the factors that can affect oil prices in the short term. With the information provided in this article, we believe that there is a strong case for a continued moderate rise in the price of oil for the rest of this year.
In the longer term, we expect a rise in crude oil prices, as the reduction in supplies fails to meet growing demand. We see this as inevitable, as I pointed out in a previous post Article on oil prices. The underinvestment of major international oil companies over the past six years will create a scenario in which the industry simply will not be able to respond to rising demand in a timely manner.
By David Messler for Oilprice.com
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