Company / Analytics

Analytics, 21 October 2021

Oil Price Rally and Market Outlook

Oil prices are rallying and are near multi-year highs as energy supply shortages continue around the globe. U.S. crude inventories hit their lowest level in three years while falling temperatures in China have revived concerns over whether China, the world’s major energy consumer can meet domestic heating needs, all signaling rising demand.

On Wednesday, Brent crude futures settled at $85.82 a barrel while U.S. West Texas Intermediate (WTI) crude settled at $83.87. Analysts, including Bank of America, predict prices could hit $100 a barrel during the first half of 2022 amid low global commercial stocks.

The oil rally has even drawn the attention of fund managers who have ramped their allocation to energy stock and betting commodity prices will remain high in the face of burgeoning demand, even though some remain unsure whether price gains will stay.

Oil demand analysis

Oil crude prices have risen as supply has tightened, with the Organization of the Petroleum Exporting Countries maintaining a slow increase in supply rather than intervening to add more barrels to the market, and as U.S. demand has ramped up. Globally, refiners have been boosting output thanks to high margins, one that can only be restrained by maintenance. In the US, refining capacity use dropped in the most recent week, but analysts noted that supply may continue to tighten if U.S. refiners also pick up processing again.

U.S. crude stocks fell by 431,000 barrels in the most recent week, the U.S. Energy Information Administration said, against expectations for an increase, and gasoline stocks plunged by more than 5 million barrels as refiners cut processing due to maintenance.

The U.S. Energy Information Administration also noted that Gasoline stocks are now at their lowest since November 2019, while distillate stocks fell to levels not seen since early 2020.

Oil Price & Outlook

Oil prices remained elevated this week as several continents continue to suffer from a major energy crunch, with China still in the limelight as falling temperatures fortified concerns that the world’s largest energy consumer will not be able to meet domestic demand for heating.

Brent prices were trending around $85 per barrel as of Tuesday morning, with WTI narrowing the spread to the global benchmark and trading around $83 per barrel. According to a Reuters report, Iraq’s Oil Minister Ihsan Abdul Jabbar Ismaael said oil prices could hit $100 a barrel during the first half of 2022 amid low global commercial stocks. This outlook is shared by other analysts as well. For instance, in early October, Bank of America said noted in a statement that surging natural gas prices, a cold winter, and reopening of international airline travel could push oil prices to $100 per barrel.

The bank also noted that the $100 price could further trigger the next global economic crisis due to the high inflationary pressure. Fears of persistent inflation around the world have risen as commodity prices soar. High prices of energy commodities, including crude oil, are set to further raise inflation which is already higher than Fed and central banks’ targets. The White House is pushing OPEC+ nations to address oil supply issues, but the oil group appears to be unmoved by high gasoline prices in the US. The Iraqi minister informed reporters in Baghdad that the OPEC+ group was considering ways to balance the market as the alliance does not want oil to exceed certain “acceptable” levels.

An “acceptable” long-term price range for oil prices would be between $75 and $85 per barrel, the Iraqi oil minister said, quoted by Reuters. At the end of last month, OPEC+ was working to keep oil prices around $70 per barrel, though they hoped prices would remain above $65 per barrel.

Saudi Arabia’s minister of energy was reported saying that consumers switching from gas to oil could account for the demand of 500,000-600,000 barrels per day, depending on winter weather and prices of other sources of energy. But the OPEC+ group is against further boosting global oil inventories, as they could lead to the collapse of oil markets.

Fund managers are buying oil

The surge in oil prices has drawn fund managers back into shares of oil and gas companies, even as some remain unsure that the price gains will stick.

Energy stocks in the S&P 500 are up more than 50% year to date compared with a 20.2% gain for the broader index. Fund managers are betting commodity prices will remain high in the face of burgeoning demand and allocations to energy stocks among fund managers increased by 23 percentage points from last month to the largest overweight since March 2012, according to a mid-October report by Bank of America.

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