STRONG economic data out of China and the US as well as rising vaccination rates has given cause for optimism, prompting Fitch Solutions Country Risk & Industry Research to revise upward its annual average oil price forecast for 2021 to US$66/barrel from US$64/barrel.
The forecast implies a rest of the year average of around US$68/barrel, broadly flat from spot.
“However, COVID-19 related risks continue to abound, most recently evidenced by the outbreak in India,” the research house which is independent of Fitch Ratings pointed out in its latest commentary.
“In our view, a combination of easing supply constraints and lingering demand-side uncertainties will weigh heavily on further price growth this year.”
After a period of range-bound trading, Brent has broken higher and is again moving to test resistance at around US$70/barrel.
“A sustained break above this level would likely trigger an upgrade to our forecast, signalling rising conviction in the rally,” opined Fitch Solutions.
‘However, it is our belief that Brent will fail to break resistance under current market conditions.”
There have been some signs of deterioration in the health of the market of late, including narrowing backwardation in Brent and underperformance of physically versus financially-settled contracts.
“In our view, the market is likely underestimating the risks related to future outbreaks of the coronavirus, the rise of new, more transmissible variants and the pace of the global vaccine roll out,” projected the research house.
“Should Brent fail to close above US$70/barrel, the spiralling epidemic in India and outbreaks among other key Asian consumers could be the trigger for a partial relapse in prices.
More broadly, Fitch Solutions observed that the picture for demand is mixed with a stark divergence emerging between the US and China, and the rest of the world.
While China’s consumption has soared above its pre-pandemic highs, emerging markets (EMs) elsewhere have yet to see their demand normalise fully.
A number of major consumers are currently battling high or rising infection rates, including Brazil, Saudi Arabia, Iran, Thailand, Turkey and, most notably, India. – May 6, 2021
