Good morning!
Oil’s traditional boom-and-bust cycle appears to have entered the boom phase, with oil prices climbing this morning to their highest level since October 2018.
U.S. crude oil prices hit US$71 per barrel this morning, as a demand surge has not yet been met with a strong response from the supply side. Western Canadian Select was also at a five-year high to US$56.75 per barrel.
“We see prices firming further with WTI and Brent averaging US$74 per barrel and US$76.50 per barrel, through the second half of this year, with intermittent sprints testing the US$80 per barrel mark potentially in the cards,” wrote Michael Tran, commodity strategist at RBC Capital Markets.
The bank raised its 2022 average forecasts for WTI and Brent, to US$72.50 and US$75 per barrel, respectively, — a 12-13 per cent appreciation from current strip prices.
And there may be more upside for oil, especially this summer.
Research firm Rystad Energy notes that heavy maintenance seasons in Canada and the North Sea will help prices stay lofty.
“In June 2021, Rystad Energy estimates more than 330,000 bpd of oil and condensate supply is offline at Canada oilsands projects, and 370,000 bpd of supply offline in the North Sea, led by maintenance on major Forties blend fields such as Buzzard and partial maintenance at Johan Sverdrup in Norway,” according to Louise Dickson, Rystad’s oil market analyst.
In addition, the G7’s pledge to donate a billion COVID-19 cases to emerging markets is also seen as bullish for oil prices, as it could accelerate global economic recovery.
Oil traders were also buoyed by news that Iranian oil may not return to the market quickly, after the country’s foreign ministry said Monday there was “very little time left” for world powers to resolve outstanding differences to revive a 2015 nuclear deal, even though an agreement was in place to remove sanctions on the country’s energy sector. Iran goes to presidential elections this week.
Supply pressures could “push the market into an overheated price environment in the summer months,” noted Rystad’s Dickson, but suggests the surge could be transitory.
“OPEC+ … has more than 9 million bpd in spare capacity that it could bring online within months to help bridge any supply gap that emerges, so a supply gap shock may not materialize.”
TD Bank economist Omar Abdelrahman is also playing down prospects of a “supercycle” in commodities, but especially in oil market.
“Energy, and in particular, oil markets, face a more uncertain trajectory,” Abdelrahman wrote in a report in May, noting that OPEC+ has plenty of spare capacity to cushion against shortfalls, and a new Iran deal would also result in an additional 1-2 million bpd on the market.
But RBC’s Tran argues that OPEC spare capacity may not be enough to cool markets and we will need to call on U.S. shale producers — the world’s swing producers before COVID-19 crashed their party — to bring equilibrium back to the market.
“While the market has been taught the Pavlovian response to be nervous anytime OPEC reopens the taps or when U.S. shale ramps up, this period in oil market history represents a paradigm shift,” Tran wrote.
OPEC spare capacity and return of Iranian oil will release the market’s “artificial tightness” and bring fundamental supply-and-demand issues back into play. Underinvestment on the supply side for years will also start to catch up with the market.
“In the event that the U.S. remains status quo and does not grow next year, global stocks could be nearly 400 million barrels lower, from entry to exit in 2022,” Tran noted. “Put another way, market balances only begin to reach a state of equilibrium if U.S. production grows by 1.2 million bpd next year. Anything short of that and balances will remain tight. And this comes after virtually all of OPEC+ spare capacity has returned to the market.” — With a file from Bloomberg News