Why oil will continue to rise in 2021

We have seen strong increases in key crude oil benchmarks, WTI and Brent, over the past few months. This was initiated by the advent of positive news on the Covid front that the vaccines in development were extremely effective, promising an end point for the spread of the virus. This upward trend in crude was spurred by the gradual decline in US shale production and inventories over the same period.

Data-EIA, chart by author

Finally, the decision taken in early January by OPEC + to limit production to mid-2021, and an additional ‘gift’ from Saudi Arabia to withdraw an additional 1 million BOPDs from the market, prompted WTI to make firm progress. in the 50s. . In this article, we will discuss the main reasons why we believe the uptrend in crude will continue this year. Why?

The demand will come back

Despite the current lockdowns inhibiting demand, the trend is upward. As vaccine implementation increases the pool of the population immune to viruses, commercial activity will resume, creating demand for refined petroleum products. The graph below shows the EIA, Energy Information Agency’s forecast for the trend of refined products over the next two years. For gasoline, the main fuel used in the United States gradually increases in the second half of 2021, then moderates in 2022, just below 2019 levels. The EIA makes assumptions about working from home and reducing trips in this forecast. The forecast is not as strong for aviation fuels, showing slight growth in 2021, but a return to near 2019 levels in 2022. Total demand is increasing and slightly above 2019 levels by 2022. Related: Pandemic Could Cause Major Oil Supply Crisis

It’s optimistic for oil prices.

The political and macroeconomic environment will push supply down

Elections have consequences. The concentration of power over the next two years, with Democrats controlling all three branches of government, will make increases in American production very unlikely. From the recent highs in 2020 where the United States produced over 13mm of BOPD, production in response to low prices fell to 11.0mm of BOPD. We will see an improved and stricter regulatory environment in the years to come. The United States will be firmly on the path to increasing renewable fuels at the expense of petroleum-based fuels. The early re-entry of the United States into the Paris climate accords will only exacerbate this trend. Fossil fuels will become more scarce, which is bullish for prices.

OPEC + surprised the world with its determination to finally push prices up. Using its power as one of the world’s top three producers of crude oil and its undisputed position as the world’s cheapest producer, Saudi Arabia has unilaterally chosen to withdraw another million BOPDs from global markets au- beyond its OPEC + commitments. It was this action that pushed oil markets above $ 50 for the first time since early March 2020. What this strongly suggests is that the cartel is resuming its traditional role of pricing crude oil for the first time. the world.

The decline in US supplies will firmly return the pricing power to OPEC +. The recently obtained $ 50 handle will likely be a floor price in the future. The glut that we have faced in recent years will continue to dissipate as capital restrictions by US shale producers continue the general downward trend. OPEC + actually has only one mission: to provide the maximum return for its members by balancing supply and demand. The current enthusiasm of Western economies for climate change is less of a motivating factor for the key countries that make up OPEC +. Their economies are mainly driven by the export of crude oil, and they all want higher prices.

The resumption of OPEC + as an alternative producer is optimistic for oil prices.

Commodity prices will explode

Last fall I wrote a Article on the price of oil where I hypothesized that there could be a commodity boom on the horizon. There is no commodity more fundamental to the global economy than crude oil. Among the factors that drive crude oil other than scarcity is the fact that it is valued in dollars, which makes it very vulnerable to inflationary pressures.

MarketWatch

The dollar index has declined over the past year, but has recently seen support with a one-week uptrend. A stronger dollar is bullish for oil prices because you get less oil for the dollar which means you have to spend more to get the same amount. This is inflationary and as noted above, crude is very sensitive to this pressure.

Related: Saudi Arabia Kicks Off New Bullish Race In Middle East Oil

We also cannot ignore the amount of stimulus that the global economy has unleashed in response to the virus. We believe that as the infection rate begins to decline, governments will begin to grapple with the historically low interest rates that have helped provide liquidity during the pandemic. There is a price to be paid for the tidal wave of cash distributed so far, and the additional stimulus to come as the Biden administration takes control of the economy. Classical monetary theory tells us that part of the price is probably inflation.

There is a temptation to compare this crisis to the financial crisis of 2008. There, the Treasury borrowed approximately $ 500 billion to provide the liquidity that prevented the collapse of the financial system. So far, in the United States alone, nearly $ 4 trillion in stimulus has been authorized, with further steps taken by the Federal Reserve to ensure that institutions, businesses and small businesses have funds needed to operate. As previously reported, the Biden administration is just getting started and has discussed additional trillions of dollars in financial stimulus for the economy.

Markwatch

Commodity prices rose sharply between 2008-2011 in the face of the stimulus provided in response to the 2008 financial crisis. The same index below shows that over the past six months the index has risen sharply. This increase is certainly linked to the amount of stimulus provided and expected by the global economy.

Markwatch

As stated earlier in this article, crude oil is the most fundamental and volatile of commodities.

A rising or sharply rising price environment for commodities is strongly optimistic for higher oil prices.

Your takeaway meals

The brevity prevents us from discussing all of the factors that could affect oil prices in the short term. With the information provided in this article, we believe there is a strong case for a continued moderate rise in oil prices for the remainder of the year.

Over the longer term, we expect crude prices to soar as declining supply fails to meet growing demand. We see this as inevitable, as I noted in a precedent Article on the price of oil. The underinvestment of major international oil companies over the past six years will create a scenario in which the industry will simply be unable to meet increased demand in a timely manner.

By David Messler for Oil chauffage

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