Oil prices have finally hit $50 last week, a projection that we made back in June this year. Bullish sentiment prevailed in the oil markets over the past week despite a significant increase in US crude oil inventories. Traders are expecting demand to pick up next year as vaccination campaigns are rolled out worldwide. Yet recent traffic data shows that road traffic is still below pre-crisis levels by 5% in Asia, 20% in Europe, and 40% in the US. The recent growth in US crude inventories is clearly due to an increase in imports and a decrease in exports. The EIA figures continue to show that demand is slowing in the United States, not only due to reduced mobility but also due to the beginning of winter season. US refinery runs are currently 2.16 million bpd below their level a year ago.
OPEC+ is set to meet this week to review November production compliance data, and with Brent currently trading above $50, the group has a good reason to celebrate the new year. While OPEC+ is set to add 500,000 bpd of production in January, it is still too early to conclude that OPEC+ will add an additional 500,000 bpd in February. Oil markets remain volatile and uncertainty continues despite the bullish sentiment seen over the past few weeks. Yet we expect the group to go ahead with its pre-set plans if prices continue to trade at this level.
The largest risk for prices currently is slowing demand and a simultaneous increase in supplies, despite vaccination campaigns. A new bout of lockdown measures in Western Europe has markets worried that optimism about the recovery could have been premature. Related: Goldman Turns Bullish On Oil: Sees $65 Brent In 2021
OPEC+ needs to stay vigilant in 2021 as COVID-19 cases continue to rise around the globe, with US COVID-19 deaths exceeding the level of 3,000 a day. Meanwhile, positive news on the COVID-19 vaccine front continues to support the markets, outweighing concerns excessive growth in US crude inventories and soaring production in Libya.
Furthermore, a recent statement from US President-elect, Joe Biden, indicates that the United States will return to the JCPOA pact leading to the lifting of sanctions against the Iranian regime if Iran adheres to strict compliance with the nuclear deal. Although signing another deal may not be as easy as it seems, it is expected that the new US administration will not be as strict as the Trump administration when it comes to crude oil exports from Iran. Iran has been reported to have instructed its oil ministry to prepare its oil facilities for production and export at full capacity within the next three months. Iranian exports in 2018 reached a peak of 2.6 million bpd. This presents a major risk for the markets being over-supplied in 2021 as Iran remains exempt from the OPEC+ agreements.
Another issue is the compliance among the OPEC+ group members, which despite being better managed in 2020 compared to previous years, remains a risk. Currently, over-producing members have until the end of Q-1 2021 to compensate for their over-production. Yet, economic situations among the OPEC+ members remain different, meaning that certain countries cannot meet their budget requirements with the allocated quota at current oil prices. This may lead to the issue of non-compliance in 2021 despite a higher allocated quota.
We think that the market's optimism has not reached its full potential yet. Further upside for prices, could however, be limited as more non-OPEC members are looking to bring back production in the face of recovering demand in 2021.
By Yousef Alshammari for Oilprice.com
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I am confident that the oil rally is here to stay underpinned by the following bullish factors.
1- The first factor is that the global economy is projected to grow in 2021 by 5.4% compared with 3.3% in 2019 led by emerging markets particularly China and India. Moreover, the Asian oil market, the world’s largest, is strengthening.
2- The second factor is that underinvestment in oil and gas will put upward pressure on oil prices. At the height of the pandemic, oil and gas investments estimated at $131 bn that were slated to be approved in 2020 were shelved, some indefinitely. This could push oil prices to between $80 and $100 by 2024.
3- A third factor is the continued OPEC+ production cuts until the end of the first quarter of 2021. Still, OPEC+ should calibrate the easing of production cuts to the global oil demand.
4- A fourth factor is that with outstanding debts approaching $1 trillion and a breakeven price of between $60 and $65 a barrel for most drillers, US shale oil could hardly expect to stage a comeback soon.
The global economy could also get a further impetus with a probable end to the trade war between the US and China under a President-elect Biden’s administration and a possible de-escalation of tension between Iran and the United States.
Based on the above, I project that Brent oil price could hit $60 in the first quarter of 2021 and $70-$80 in the third quarter. This trajectory will give an average price of $65-$70 in 2021 and testing $100 by 2024.
Dr Mamdouh G Salameh
International Oil Economist
Visiting Professor of Energy Economics at ESCP Europe Business School, London