AT the rate of its current price movement, crude oil prices can potentially test the US$80/barrel level before the market puts a lid on demand growth.
Anything above that level will have adverse implications for economic growth as a fair bit of demand destruction could kick in, according to AmResearch.
“Thus, we expect Brent to briefly test a high of US$70s a barrel before European buying start to wane and the potential return of Iranian barrels,” opined head of research/chief economist Dr Anthony Dass in a thematic research on the oil & gas (O&G) sector. “That should see Brent price retracing to the low US$70s level.”
For 2021, AmResearch expects OPEC to hold prices above US$70/barrel. Nevertheless, its forward curve suggests the fair value to be slightly below US$70/barrel, ie around US$68/barrel.
From an average price of US$38/barrel and US$35/barrel at the height of the unprecedented global lockdown measures to contain the COVID-19 outbreak in 1H 2020, both the Brent crude and West Texas International (WTI) have seen their average prices improved to US$44/barrel and US$42/ barrel in 2H 2020.
For 2021, the outlook for Brent is around US$68-US$70/barrel, underpinned by an improving global economy with Brent and WTI reaching average prices of US$66/barrel and US$62/barrel respectively in 1H 2021.
Year-to-date (YTD), the average prices of Brent and WTI were US$67/barrel and US$64/barrel respectively.
Elaborating further, AmResearch noted that the positive oil price trend could come to an abrupt end if global central banks start to raise interest rates unexpectedly driven by inflation fears.
“This could also happen if OPEC raises output above demand or fails to absorb the extra Iranian barrels (2.5 million barrels/day) when the Persian Gulf OPEC member returns to the market,” cautioned the research house. “Nevertheless, it looks likely that OPEC+ will be able to absorb the additional Iran’s oil exports.”
Other uncertainties that could cloud the oil price outlook include the spread of the Delta COVID-19 variant worldwide has raised concerns over a potential setback to oil demand. Additionally, renewed lockdown measures to contain the virus spread plus higher costs have already dampened factory growth in China.
“However, despite a more positive sentiment in financial markets, China has made progress to contain the fast-spreading Delta variant, bringing their local cases down to zero,” observed AmResearch.
“We also expect OPEC+ to fully comply with the agreement during 2H 2021. OPEC’s crude oil output would remain lower than calls through 3Q 2021 and 4Q 2021.” – Aug 25, 2021
