Oil prices will rise faster in the rest of 2020 as well as over the next two years due to recovery in mobility demand, Opec+ holding back larger supply volumes than anticipated and a decline in US shale supply, say energy analysts.
"Global oil market fundamentals have shifted significantly since we last adjusted our oil price forecasts in March," said Karen Kostanian, research analyst at Bank of America Merrill Lynch. "We now lift our 2020 Brent price forecast to $43.7 a barrel (from the earlier $37). We also increase our 2020 average WTI crude oil price forecast from $32 to $39.7 per barrel," she said.
BofA-ML increased its 2021 Brent price forecast to $50 per barrel, $7 above the forward, and 2022 forecast to $55 from $50 per barrel. "The tighter global oil supply and demand backdrop also lifts our WTI forecast to $47 and $50 a barrel in 2021 and 2022, respectively, so US shale output starts to return to market in second-half of 2021," said Kostanian.
The rally in oil prices started to stall last week due to an acceleration in the number of the Covid-19 cases globally, threatening the viability of demand recovery. The reopening of several major US states has been put on hold as the Covid-19 cases are increasing and in some instances posting record single-day numbers.
Brent futures fell by 2.8 per cent over the past week, setting at $ 41.02 barrel per day while WTI closed at $38.49 a barrel, a more than 3 per cent drop.
The US bank estimated that global oil demand dropped by 14 million bpd in H1 2020, leading to an 11 million bpd surplus.
"We see a quick reversal going forward, and expect the market to register a deficit of 2.5mn bpd in second half of 2020 and 1.7m bpd in 2021. Beyond the Opec+ cuts, there are other regions contributing to flip the balances. Non-Opec+ output may drop by 1.5 million bpd this year and rebound just 150,000bpd next year despite our expected 8 million bpd global oil demand bounce. Also, US crude production growth is set to decline 0.6m bpd in 2020 and by 0.4m bpd in 2021," added Kostanian.
The bank expects US supply to fall sharply into Q1 2021 and then start to recover in H2 2021 as global oil balances post a persistent deficit starting H2 2020. As such, prices will have to eventually rise to signal some investment back into the shale industry, it added.
Edward Bell, commodity analyst with Emirates NBD Research, said as the spectre of lockdowns hangs over the oil market this year, rallies are likely to be supported by supply side adjustments as demand will be held in check by public health considerations.
"The dramatic decline in the US drilling rig count appears to have found a near-term floor with exploration and production companies only taking one rig out of operation last week with the total number levelling off a little below 200, mostly concentrated in the Permian in Texas," he added.
Vijay Valecha, chief investment officer at Century Financial, said crude declined last week as resurgence of Covid-19's second wave kept overall risk market gains in check.
"Various US states including rural areas where the virus had previously not affected are now reporting considerable rise in new cases. With current Opec+ production cuts about to expire by July end, all eyes will be on Opec+ schedule for coming months. The group is likely to announce its intentions some time in start of next month in order to further sooth market sentiments. Technically, the current correction comes from the resistance high of $40. WTI August has strong support near $34.50 levels," said Valecha.
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