Spurred by a confluence of vaccine optimism, US stimulus, prospects of a weaker US dollar and stern Opec+ discipline, Brent and WTI are likely to breach $70 per barrel (/b) and $65/b, respectively by year-end, a report said.
Oil’s steady rebalancing since peak inventories in Q2 2020 has continued unabated throughout winter, and since the start of 2021, demand indicators have picked up, signalling year-end softness was largely seasonal, rather than entirely driven by tighter mobility restrictions, according to the latest Oil Market Weekly from the Mitsubishi UFJ Financial Group (MUFG), a leading global financial services group in Japan.
This, in conjunction with the unexpected boost from colder than expected weather in Asia, is a strong signal that the market will remain in a deficit (demand above supply).
“With vaccine rollouts now gathering pace across developed markets during what is likely the last widespread lockdown without a vaccine-resistant variant, we see a clear path to continued rebalancing once we move past the Q1 winter speed bump,” MUFG said in the report.
This strengthens the positive carry via backwardation – a bullish structure where nearer-dated contracts trade at a premium to later-dated one and thus signalling supply tightness – which allows investors to own oil (and broader commodities) as a hedge against financial market uncertainty and be rewarded for doing so. This stands in stark contrast to most of 2020 when the carry was sharply negative, making zero interest on cash a much safer hedge to financial market uncertainty.
From an oil price perspective, the clearer trajectory in a tightening in fundamentals leading to a swifter draw of inventories back to normalised levels brings clear upside risks to previous Brent and WTI forecasts.
The sheer velocity of the leg up in oil prices since the turn of the year prompts further price hikes, as markets continue to carve out new contours of normality towards a post-virus equilibrium, the report said.
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