Rapid Demand Recovery Hints At Even Higher Oil Prices

Brent prices hit a three-year high at $80 a barrel early on Tuesday, driven by recovering demand and a global energy supply crisis pushing up the use of oil and prices of fossil fuel commodities. The rally to $80—the first time Brent Crude prices have exceeded this mark since September 2018—may have legs for further upsides, analysts say.

Oil demand globally is recovering from the summer Delta variant spike faster than some observers had expected. Soaring prices of natural gas and coal in Europe and Asia are forcing more gas-to-oil switching at power generating units globally, further pushing up demand for oil.

On the supply side, Hurricane Ida disrupted production in the U.S. Gulf of Mexico, and some OPEC+ members are struggling to pump to the full capacity of their quotas. In addition, U.S. shale producers show remarkable never-seen-before discipline in drilling activity despite the fact that the U.S. benchmark, WTI Crude, has been trading above $60 a barrel for nearly six months—since the middle of April.

The global energy crisis and the recovery in oil demand after the July slump caused by the Delta variant are making investment banks, oil producers, and oil trading giants more bullish about oil prices in the coming quarters, especially in view of a muted supply response to the rise in demand.

Oil Demand Set To Return To Pre-COVID Level By Early 2022

Many analysts and oil companies see global oil demand returning to the pre-crisis levels of 2019 as early as the start of next year, if not earlier, by the end of 2021.

The oil industry is “massively underinvesting” in supply to meet growing demand, which is set to return to pre-COVID levels as soon as the end of 2021 or early 2022, Greg Hill, president of U.S. oil producer Hess Corp, said on Monday.

Oil demand worldwide is expected to hit 100 million barrels per day (bpd) by the end of this year or in early 2022, Hill said, adding that demand next year is set to rise to 102 million bpd—exceeding pre-pandemic levels.

ConocoPhillips’ chief executive Ryan Lance also thinks that oil demand would bounce back to pre-pandemic levels by early 2022.

According to OPEC, the surge of the Delta variant is set to partially delay oil demand recovery into the next year. But then robust economic growth and stronger recovery in fuel consumption will see global oil demand averaging 100.8 million bpd and exceeding pre-COVID levels, OPEC said in its latest monthly report, raising its 2022 demand forecast by as much as 900,000 bpd.

The International Energy Agency (IEA) sees strong pent-up demand beginning in October and continuing through the rest of 2021, although its demand outlook is not as bullish as OPEC’s.

The global energy crunch, with natural gas prices at all-time highs in Europe and coal stockpiles very low in Europe and parts of Asia, adds more fuel to the bullish forecasts. Analysts and members of OPEC expect the gas crisis to boost oil demand by up to 1 million bpd this winter. According to Mele Kyari, managing director of the Nigerian National Petroleum Corporation (NNPC), the gas crunch could push oil prices up by around $10 per barrel over the next three to six months.

$100 Oil?

Goldman Sachs raised this week its end-2021 oil price forecast to $90 a barrel Brent from $80 per barrel projected earlier, expecting tightening oil markets with robust demand recovery and supply constraints from Hurricane Ida and weak supply response from non-OPEC+ oil producers.

The oil market is currently tightening, ING strategists Warren Patterson and Wenyu Yao said on Tuesday.

“The forward curve continues to strengthen and the ICE Brent Dec’21-Dec22 timespread is trading in a backwardation in excess of US$7/bbl, up from less than US$4/bbl in August. A growing backwardation along the curve reinforces the view of a tightening market,” they noted.

“We’re going to see higher oil prices,” Ben Luckock, Co-Head of Oil Trading at commodity trading giant Trafigura, told Bloomberg in an interview published on Monday.

“I struggle to see anything but higher prices going forward in the next two years,” Luckock said.

Trafigura’s chief economist Saad Rahim doesn’t rule out $100 oil at some point at the end of 2022, despite COVID challenges to demand this coming winter.

“Not just the price, but the level of backwardation we are seeing is telling us the market is hungry for oil,” Saad Rahim, chief economist at Trafigura, said during the virtual Argus Asia-Pacific Crude Forum last week, as carried by Argus.

In a market apparently hungry for oil, analysts will be closely watching the next monthly meeting of the OPEC+ group scheduled for Monday, October 4.

Oil at $80 is often the ‘demand destruction’ price point, at which major consumers and importers of crude such as India and China start balking at the high oil prices and lower their purchases.

By Tsvetana Paraskova for Oilprice.com