Company / Analytics

Analytics, 30 September 2021

Oil Price Surge and Outlook

Oil prices are rising driven by unexpectedly high demand and catastrophic hurricanes halting production. Prices went higher for a fifth-straight day on Monday, hitting their highest levels in three years and analysts pointed out that cold winter weather and a busy pandemic travel season will boost prices further.

Analysts at Goldman Sachs raised the oil price forecast to $90 a barrel, above the $80 a barrel price on Tuesday. Brent crude has gained about 55% for the year to date while the WTI surged by about 60%.

Oil Price Action

Oil prices climbed above $80 a barrel on Tuesday, hitting their highest level in three years as the pound slumped. West Texas Intermediate (WTI) also rose to around $75 a barrel. Prices have been rising for seven consecutive days on the back of the energy crisis in Europe.

Brent crude has gained about 55% for the year to date while the WTI surged by about 60%.

Prices slumped at the start of the pandemic in 2020; in April 2020, they fell below zero for the first time in history as lockdown wiped out demand while producers continued to pump crude from their wells. But demand has been in recent months as economies around the world have started to reopen.

Oil will keep surging

Analysts believe that oil prices will continue to rise amid surging demand and tight supplies. Investment bank Goldman Sachs said Brent could hit $90 per barrel by the end of the year, warning that rising input costs, higher gas prices, and weaker growth were likely to weigh on European corporate profit growth for 2021.

Last month, global supplies took a hit from hurricanes Ida and Nicholas which damaged US oil infrastructure. Those events alone drove prices higher by about 10%. The hurricane-related shutdowns effectively canceled out the impact of modest production hikes from international producers earlier this summer, Goldman Sachs analysts wrote in a Sunday note, calling Ida the “most bullish hurricane” for oil prices in U.S. history.

Demand remains robust, having recovered from the delta variant-spurred spread of Covid-19 which spread quickly than anticipated and created a “larger than expected” gap between oil supply and demand.

Angola and Nigeria are also struggling to produce as much as they could, adding to the global inventory decline.

Meanwhile, a dramatic surge in natural gas prices has also made oil a relatively cheaper alternative for power generation, which in turn has increased demand. Goldman noted, upping its year-end forecast for Brent Crude prices from $80 to $90—suggesting prices could rise another 12% in the next three months.

OPEC Action still awaited

It remains to be seen how OPEC+ will react when it conducts its next meeting on the fourth of October, but internal documents have already highlighted that global oil demand might be boosted by 370kbpd if natural gas prices remain elevated, according to an Oil newsletter.

Questions also remain whether prices will remain above $80. It should be noted that it was only November ICE Brent that breached that psychological barrier as all subsequent months dipped deeper into backwardation. It wasn’t long before Brent fell back to $79, however, with traders locking in gains.

Morgan Stanley analysts foresee global oil supply getting tighter, citing an average of 3 million barrels of crude per day of inventory draws in the last month, compared to 1.9 million barrels per day drawn in the preceding months of this year, especially considering developments in China.

The Delta variant is slowing economic growth in the East Asia and Pacific region, and growth forecasts have been downgraded for most of the region’s countries. Meanwhile, China faces a potential slowdown amid a growing power shortage that’s hitting factories, homes, and supply chains.
China and India, some of the world’s top oil importers, began selling oil this month from their strategic reserves in an unprecedented move to try to lower crude prices as energy costs surged across the region. While it hasn’t succeeded in lowering global prices, it sent a significant message.

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