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Cyril Widdershoven

Cyril Widdershoven

Dr. Cyril Widdershoven is a long-time observer of the global energy market. Presently he works as a Senior Researcher at Hill Tower Resource Advisors. Next…

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Oil Bulls Beware: This Optimism Is Unjustified


Optimism seems to be ruling global oil markets at the moment.

Even the recent OPEC report, in which the global oil group cut its demand predictions for Q2 2021 by more than 690,000 bpd, seemed unable to alter price assessments. Bullishness stemming from the OPEC+ production cuts continues to rule the market, with analysts happy to assume that the cartel will remain optimistic in its assessment of H2 2021. 

With oil prices hovering around $70 per barrel and some analysts even suggesting that the fabled $100 per barrel is within sight, it seems all sense of realism has been lost. Brent is set for its eighth straight week of gains, and the market is happy to all but ignore the fundamentals. 

Analysts seem convinced that demand recovery in H2 2021 is a certainty. If you were to ask them what that assumption is based on, there is no specific answer but rather a reference to ‘sentiment’. Biden’s recent announcement that Americans could be having barbecues with their families on the 4th of July, that sentiment is only growing stronger. Additional financial support schemes around the world are adding to this sentiment. In fact, oil prices seem to be more closely linked to the cash injections being given out around to world than to historic fundamentals. However, as we all know, “there’s no such thing as a free lunch”. These financial injections are going to come at a cost. No normal economy can continue to spend as its income continues to fall. At the end of 2021, a major rebalance in payments can be expected, and there will be many losers. In the coming months, demand is expected to weaken slightly, as highlighted in OPEC’s recent report. The bullish sentiment in oil markets seems based on the period after summer though. Strong demand in the second half of the year will depend on successful COVID vaccination schemes and a decrease in global lockdowns. If the optimistic predictions of a successful summer fight against covid don’t come true, oil bulls are set to be slaughtered. 

The current commodities frenzy has largely been fed by institutional investors and hedge funds, all vying to reap the financial rewards of an over-optimistic market. Media reports have been fueling this optimism, as most investors prepare for the recovery of crude oil demand. Fuel analysts are confident that driving season in the U.S. and Europe will increase prices despite most vaccination projects still being far from complete. With no real travel increase on the horizon, a fuel demand increase seems far from certain. Additionally, when looking at the oil futures market, it seems optimism isn’t as strong as it first appears. Net long vs net short positions are at nearly the same level. So even when it comes to bullish sentiment, it seems media reports are exaggerating where we are.

When looking at current price settings, hovering around $70 per barrel, and plenty of bullish sentiment amongst analysts, observers should be worried. In a normal situation (pre-COVID), price increases as we have seen in recent months always lead to two main reactions. First, parties will take their profits, then others will look to get into the market. The current stability on the supply side is purely cosmetic. OPEC+ unexpectedly decided to roll-over its existing agreements for another month. Saudi Arabia is still supporting its unilateral 1 million bpd cut, while others are keeping to their existing commitments. Non-OPEC producers Russia and Kazakhstan were allowed to increase their production slightly. 

Media reports have all been very positive about the decision in Vienna last week, painting it as proof of the internal stability of the cartel. But that analysis fails to address the growing internal pressure of major OPEC and non-OPEC producers to increase their own volumes in the coming weeks or months. $70 per barrel is a very enticing level to increase production, and cash is needed throughout OPEC+. OPEC+ producers have lost trillions of dollars in the past year, and now they have the ability to make up for that loss. 

At $70 per barrel, producers not controlled by OPEC+ are also looking to boost production. Profit margins of $10-15 per barrel are too high for most producers to ignore. JP Morgan’s recent assessment suggests that U.S. shale is going to be bringing more production online soon. There are also reports that the real OPEC+ compliance rate is different from the official quotas. Market analysts should be keeping an eye on Saudi Arabia, the UAE, and Russia. It is likely that all three markets are already producing more crude than is being reported. Internal demand for crude is also playing a key role in these countries maintaining compliance. In Saudi Arabia, for example, Aramco’s latest refinery project will account for 300-400K barrels per day. Both US shale and Libyan production are certain to increase if price levels are kept at around $70 or higher. Greed is the blood of capitalism, and the oil and gas market has some of the most tempting profit margins out there at the moment.

While optimism may be ruling the market right now, bearish sentiment could flood back into oil markets very soon. At current prices, supply is certain to increase, while demand is far from guaranteed. It is too early to call it a bear market, but observers should be wary of being overly optimistic when the fundamental balance of the oil market remains decidedly delicate.


By Cyril Widdershoven for Oilprice.com

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Leave a comment
  • David Tracy on March 14 2021 said:
    Fundamentals havent mattered since the 90s
  • Mamdouh Salameh on March 15 2021 said:
    Before I rebut the author's arguments, I would like to introduce a bit of common sense to the discussions.

    If Brent crude oil price is knocking at $70 oil at a time when the global economy hasn’t yet opened widely, how high will oil prices surge when the full effect of global vaccination is felt and the global economy returns to normal economic activities.

    And while sentiments in the market could push oil prices up for a short while, current sentiments are solidly underpinned by bullish factors.

    Other than the economic stimulus packages, oil prices will be underpinned in 2021 and the coming years by a return of the global economy to normal business activities as a result of the global rollout of anti-COVID vaccines, a fast-depleting global oil inventories, almost complete compliance by OPEC+ with the production cuts, the insatiable thirst of China and India for oil, the global oil industry’s investments and US shale oil industry. Moreover, the global economy is projected to grow by an estimated 5.4% in 2021 and 3.7% in 2022 led by emerging markets particularly China and India which are in turn projected by the IMF to grow at 8% and 8.3% respectively.

    Oil prices are now definitely in a bull market that could last several years and therefore their surge is unstoppable. I have never before seen so many bullish factors joining hands and pushing oil prices in one direction: upwards.

    Prices could be passing through a super-cycle defined as a prolonged rise in the oil prices that could see them rise to $80 or even $100 a barrel or merely reflecting a great pent-up force which both the global economy and global oil demand were unable to release whilst the COVID-19 was raging. Either way, crude oil prices have a very long way to go with $100 oil in sight.

    The pandemic forced the global oil industry to defer as much as $131 billion worth of oil and gas projects which were slated for approval in 2020. This event alone could create a supply deficit estimated at 10-15 million barrels a day (mbd) in 2022/3 and see Brent crude price rise beyond $100 if the deferment decision isn't reversed soon.

    Brent crude is projected to hit $70-$80 in the third quarter and average $65 in 2021 with global oil demand returning to pre-pandemic level of 101 mbd by the middle of this year. We could also see $100 oil by the second half of 2022 or the first quarter of 2023.

    And contrary to claims that high oil prices slow down oil demand, both the global economy and global oil demand are stimulated by high oil prices. The rationale is that the global economy is made up of three major chunks: the global investments, the global oil industry and the economies of the oil-producing countries all of which would be invigorated by higher oil prices leading to growth in the global economy and therefore global oil demand.

    The ‘black gold’ which is the blood of the global economy is depleting quickly. Therefore, its price should be commensurate with its unrivalled value to the world.

    In my opinion, a fair oil price ranges from $100-$110 a barrel. Such a price invigorates the global economy and stimulates therefore global oil demand.

    OPEC has every right to maximize the price of oil to the level that the global economy can tolerate.

    Dr Mamdouh G Salameh
    International Oil Economist
    Visiting Professor of Energy Economics at ESCP Europe Business School, London
  • jone al sharon biriyani indian on March 15 2021 said:
    USA has only liars with a big mouth. they got no oil. empty vessels make more noise.
    Commodity traders are reporting false figures about holding excess oil inventory. this is the only weapon in the hands of traders 'false data' and keep prices low.
    but now OPEC+ nations knows the truth an hence they feel 'sentiments' and news will not rule but factual data.
  • jone al sharon biriyani indian on March 16 2021 said:
    oil prices will cross $100/barrel by this summer. As demands rises during this summer in USaA.
    and shale oil is still a myth. lol

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