After a volatile week of reversals and re-reversals, oil prices have rebounded a bit again on Wednesday thanks to an overall risk-on theme returning to the markets after the Senate passed the crucial $1 trillion infrastructure spending bill. September WTI crude (CL1:COM) closed +2.7% to $68.29/bbl, while October Brent (CO1:COM) settled +2.3% to $70.63/bbl.
The biggest challenge for oil markets has been the fast-spreading Covid-19 Delta variant hurting confidence about a global economic recovery, with market participants watching the rapidly swelling infection figures with considerable alarm. Even more worrying are new developments in China, the world's biggest crude importer and once the world's Covid-19 epicenter, after Beijing imposed new lockdowns in at least 144 of the worst-hit areas nationwide in a bid to stop the spread. Beijing has opted to employ its tried-and-tested method of targeted lockdown that has been successful in stopping at least 30 Covid-19 flare-ups in the past.
Adding to the pressure on the oil bulls are reports that the Biden administration is worried about high oil prices and wants OPEC+ to increase production in order to lower prices for consumers. According to the report, U.S. officials spoke this week with representatives from several OPEC members, including Saudi Arabia and the United Arab Emirates.
The Biden administration is reportedly saying the July OPEC+ agreement to gradually ease production cuts into next year is not enough during a "critical moment in the global recovery."
Bullish: some analysts are saying that the worst could be in the rearview mirror, and oil prices could have established a new floor.
When the July WTI contract managed to close Monday above the July low at $66.41/bbl, it marked that level as a "line in the sand for the oil market."If support holds, which it likely will as long as the news flow regarding COVID does not continue to materially deteriorate, then WTI will remain range-bound between aforementioned support at $66 and resistance from July at $75 a barrel," Tom Essaye of the Sevens Report has told MarketWatch.
Related: How Can Emerging Markets Capitalize On Geothermal Energy’s Potential? As with every other sector, there's a pretty big dichotomy in Wall Street regarding the oil price outlook, with both strongly bullish and strongly bearish views.
The good news: Wall Street remains largely bullish about the oil price trajectory.
Here are different oil price outlooks by a cross-section of Wall Street experts.
The Bulls:
UBS
Treasury yields have climbed sharply over the past year, with the 10-year note going from 0.675% to 1.356% currently. Indeed, Treasury yields are now matching the overall S&P 500 (NYSEARCA:SPY) dividend yield.
UBS maintains a pro-cyclical bias, expecting rates to climb further. With a strong tilt to recovery, UBS says it favors Energy (NYSEARCA:XLE), Consumer Discretionary (NYSEARCA:XLY), Financials (NYSEARCA:XLF) and Industrials (NYSEARCA:XLI).
"Overall, our outlook for growth in the economy and corporate profits remains unchanged and our fixed income team expects interest rates to reverse course and for the 10-year Treasury yield to rise toward 2% by the end of the year. We therefore view the recent underperformance of cyclical segments as temporary."
Bank of America
Back in June, a Bank of America analyst made waves after predicting that oil prices could be headed to $100.
BofA commodities strategist Francisco Blanch said he sees a case for $100 a barrel oil in 2022 as the world begins facing an oil supply crunch:
"First, there is plenty of pent up mobility demand after an 18 month lockdown. Second, mass transit will lag, boosting private car usage for a prolonged period of time. Third, pre-pandemic studies show more remote work could result in more miles driven, as work-from-home turns into work-from-car. On the supply side, we expect government policy pressure in the U.S. and around the world to curb capex over coming quarters to meet Paris goals. Secondly, investors have become more vocal against energy sector spending for both financial and ESG reasons. Third, judicial pressures are rising to limit carbon dioxide emissions. In short, demand is poised to bounce back and supply may not fully keep up, placing OPEC in control of the oil market in 2022," explained Blanch.
Blanch's bullish prediction is so far the boldest by mainstream Wall Street banks.
Goldman Sachs
Two months ago, U.S. investment bank Goldman Sachs predicted that Brent would reach $80 a barrel in the summer.
Well, that was before the Delta variant started running riot everywhere.
Goldman Sachs has now lowered its forecast after the latest pandemic trends, but still expects Brent crude oil to average $75 a barrel in the third quarter.
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Regarding the worrying trend of rising inflation, Goldman Sachs shares the Fed's view that the price pressures are largely transitory and should subside in the coming months. However, should high inflation persist beyond six months, Goldman says companies with pricing power are likely to do well. Sectors that have historically done well in high-inflation environments are Energy, Real Estate (NYSEARCA:XLRE), Health Care (NYSEARCA:XLV) and Consumer Staples (NYSEARCA:XLP).
The Bears:
Morgan Stanley
A few days ago, Morgan Stanley went full bear on the energy sector, saying it prefers the Utilities sector due to the latter's superior defensive qualities.
"With our more defensive tilt and the risk reward skews outlined above, we're changing our order of preference between Utilities and Energy," Morgan Stanley says.
MS raised Utilities to Equal Weight from Underweight and downgraded Energy to Underweight from Equal Weight.
Over the past week, XLU was one the best-performing sectors after climbing 4.9% while Energy was lower among the cyclicals, up a mere 0.2%.
Nevertheless, MS says it "maintain a positive bias given strong free cash flow projections, but given our more cautious view on risk assets, the limited house upside forecast for oil, the importance of rate of change in oil price to sector performance, our revisions breadth analysis above, and a worsening technical picture for Energy equities, our top down preference skews more negative pending a price reset."
So, MS might not be so bearish after all.
Here's a rundown of the latest brokerage forecasts for 2021 average prices per barrel for Brent and WTI:
Brokerage/Agency Brent/WTI Date Revised
Barclays $69.00/$67.00 July 22
Goldman Sachs Commodities Research $72.70/$69.80 July 20
Credit Suisse $70.00/$67.00 July 18
ABN Amro $66.00/$63.00 June 23
Citi Research $72.00/$64.00 June 22
BofA Global Research $68.00/$65.00 June 20
Societe Generale $64.00 -- June 8
Commerzbank $65.00 $62.00 May 6
Barclays $66.00/$62.00 March 23
BofA Global Research $63.00 $60.00 March 15
Societe Generale $65.60 - March 9
Goldman Sachs Equity Research $72.61/$69.75 March 5
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Commerzbank $62.00/$59.00 March 5
Goldman Sachs Commodities Research $72.70/$69.80 March 5
ABN Amro $63.00/$60.00 March 5
JP Morgan $67.00/$65.00 March 4
ING Economics $65.00 - March 4
UBS* $75.00 - March 4
Goldman Sachs Commodities Research $68.90/$66.00 +March 1
Barclays $62.00/$58.00 Feb. 25
BofA Global Research $60.00/$57.00 Feb. 22
UBS* $68.00/$65.00 Feb. 16
ABN Amro $55.00/$51.00 Feb. 12
Barclays $55.00/$52.00 Jan. 25
ANZ $57.90/$55.30 Jan. 15
Citi Research $59.00 - Jan. 8
Standard Chartered $51.00/$49.00 Jan. 6
UBS* $63.00/$60.00 Jan. 6
* indicates end-of-period forecast
+ Denotes forecast as of March 1, and not revision date.
By Alex Kimani for Oilprice.com
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And while these concerns have slowed down oil demand slightly, they will never arrest it. My rationale is that since China is universally acknowledged as the driver of both the global economy and oil demand, it is already taking draconian decisions similar to the ones it took during the height of the pandemic in 2020 to end the pandemic. It succeeded in 2020 despite the absence of vaccines and led both the global economy and the global oil demand out of the doldrums and it will do so again very shortly with the availability of billions of vaccines.
OPEC+ continues to monitor the global oil market and will take whatever decisions to ensure stability in the market and relatively high oil prices approaching $80 a barrel this year because this is the price the overwhelming majority of its members need to balance their budgets. One thing OPEC+ isn’t going to do is increase production beyond what has already agreed to stop gasoline prices in the United States rising further. This is neither the job of OPEC+ nor its intention and therefore, President Biden’s call on OPEC+ to raise output further will fall on deaf ears.
My projections remain robust with Brent crude expected to touch $80 a barrel before the end of 2021 and average $71-$72 for the year with global oil demand amounting to 100 million barrels a day (mbd).
My projections might be at variance with many investment banks and other forecasters but I invite them to ask themselves how many times in the last 10 years has the global economy managed to grow at 6.3% as it is doing in 2021 and how many times during the same period has China’s economy managed to grow at 8.3%. The answer to both questions is none, hence my optimism.
Dr Mamdouh G Salameh
International Oil Economist
Visiting Professor of Energy Economics at ESCP Europe Business School, London