Pundits See Prices Back on Rise in 2022

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Oil trade has been volatile lately, with intraday price swings of several dollars becoming common amid intense cross currents. Variants of Covid-19 and governmental responses to halt the spread continue to delay demand recovery, adding to an expected supply surplus in the first half of 2022. Yet, most price pundits see crude rising next year, particularly in the first half. They see the potential for an immediate supply crunch from high natural gas prices prompting fuel switching. Further down the line, they warn of a crunch from structural underinvestment — or Opec-plus engineering. An overview of pundit forecasts shows Brent at $76.89 per barrel and West Texas Intermediate (WTI) at $73.72 in 2022. Some see prices spiking in the first half of the year before easing as 2023 approaches, largely a function of demand recovery meeting Opec-plus unwilling to add supply. While the consensus view is that prices will rise in 2022, the scale varies. Bank of America Merrill Lynch (BAML) sees second-quarter Brent at $95. The Energy Information Administration (EIA) sees Brent trading at roughly $71 during the same time period. Energy Intelligence puts Brent at $83, expecting high summer demand.

While Opec-plus is for now committed to monthly supply increases of 400,000 barrels per day, the thinking among bullish forecasters is that capital discipline across much of the industry and production outages elsewhere will keep output under pressure. Those pundits seeing much higher prices also call into question the ability of Opec-plus to meet its rising targetsAnalysts with investment bank JPMorgan Chase see Opec-plus production running some 2 million b/d below consensus expectations next year. “We expect Opec-plus to delay planned output growth in early 2022 … all else equal, deferral of [planned] production growth for three months at the start of 2022 would wipe out expected surplus and leave the market balanced,” the bank’s commodities team said. JPMorgan also questions the bloc’s ability to hike output by monthly increments of 400,000 b/d, predicting a functional increase of 250,000 b/d. Elsewhere, supply remains hampered due to the pandemic’s impact on investment and the ongoing energy transition. “US E&Ps have remained disciplined this year and reiterated low to no-growth investment plans ... This continued discipline combined with an increased focus on decarbonization, particularly for the EU majors, has limited supply growth” amid rising consumption, noted analysts with investment bank Morgan Stanley. To wit, the EIA recently revised its forecast US crude production for 2022 downward by 50,000 b/d — next year’s output is seen at 11.85 million b/d on average, still up 670,000 b/d, but more than 1 million b/d below its pre-pandemic peak.

Meanwhile, demand keeps climbing. Most pundits see disruptions from viral variants such as the current Omicron as transient, resulting in quick lockdowns that do not present structural headwinds to incremental consumption. Even the more bearish Citi said impacts from variants will get shorter and shallower over time. Jet fuel remains a key variable. “Oil demand is now roughly back to the level it was before the start of the corona crisis,” said analysts with ABN Amro, echoing similar rhetoric from refiners during recent quarterly earnings calls. Differing outlooks on price recovery are closely tied to expectations for air travel. BAML is particularly bullish on jet, with a first-half recovery in demand helping to propel oil as high as $125 in a bullish scenario. Goldman Sachs analysts, meanwhile, acknowledge that Covid-19 variants will roil jet demand but said such mutations pose a mere $5 downsize risk to forecasts. Jet poses a key stumbling block for higher refinery utilization and thus crude demand, so as travel picks up, throughputs could too. Data from Energy Intelligence show jet fuel cracks against incremental crude are at their highest since the first quarter of 2020 in the US, Northwest Europe, and Singapore. 

The market’s current action calls some of the bullish attitude into question, however. Benchmark Brent recently underwent a significant sell-off, to below $66. Prices have recovered to around $75 but are still $10 below recent highs. Crude oil time spreads are signaling that tightness may be overstated. Uncertainty remains a key issue for this market that should keep volatility high. After all, winter tightness can further thin inventory levels for especially products, and refiners would need to buy more crude to replenish those. That could prevent the current prompt premiums over later supply to narrow even further, which is what the bulls are expecting — especially if Opec-plus tightens taps.

Brent Price Forecasts
Energy IntelligenceNANANANANANANA
Deutsche Bank74.
ABN Amro79.
Saxo Bank67.072.583.083.0NA71.081.0
Morgan StanleyNANANANANA70.072.9
WTI Price Forecasts
Energy IntelligenceNANANANANANANA
Deutsche Bank71.
ABN Amro76.
Saxo Bank64.070.581.081.0NA68.578.0
Morgan StanleyNANANANANA67.269.7

Oil Prices, Oil Forecasts, Crude Oil
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