Oil may hit $70 a barrel as weak dollar, Opec+ actions weigh

Dubai - A weaker dollar has been a core driver of the upside, buoyed also by the sheer velocity of the latest Opec+ actions to remove 1.1 million barrels per day of crude compared to expectations

With oil markets roaring ahead in the first two weeks of 2021 to record a 10-month high, analysts do not rule out that the prices of Brent and WTI could even breach $70 per barrel and $65 per barrel respectively by the year-end.

The US Energy Information Administration (EIA) has already modestly raised its forecast for Brent spot average and West Texas Intermediate (WTI) spot average prices for 2021. However, MUFG Bank is more bullish its oil price narrative with Brent trading at a 10-month high of $56 per barrel, up eight per cent year-to-date.

“Such an early pivot in this final stage of our post-virus oil price thesis brings clear upside risks to our Brent and WTI forecasts and we do not rule out breaching $70 per barrel and $65 per barrel, respectively by year-end, as markets carve out new contours of normality towards a post-virus equilibrium,” says Ehsan Khoman, director head of Emerging Market Research at MUFG.

The bank noted that a weaker dollar has been a core driver of the upside, buoyed also by the sheer velocity of the latest Opec+ actions to remove 1.1 million barrels per day of crude compared to expectations, which should counteract demand weakness stemming from mobility restrictions in parts of the world, leading to a much tighter global oil market in first half of 2021, especially as vaccine rollouts accelerate this spring.

Analysts at Kamco Invest said on Sunday that the rally in crude oil price continued during January-2021 after closing 2020 comfortably above the $50/b mark. “The recent rally came on the back of a number of factors including the colder temperatures, announcement from Opec+ on continued production cuts, a drop in inventories in the US, weak dollar and the accelerated pace of vaccination across the globe.”

Kamco noted that factors that affected prices were mainly related to the resurgence of Covid-19 cases in Europe that has resulted in stricter lockdowns amid record high new cases and the re-imposition of lockdown in China. “A rally in global equity markets with several large markets including the US, Japan and India at record highs also supported sentiment in the oil market.”

Analysts at MUFG forecast that average prices of Brent in 2021 would be $58 per barrel and WTI $54 per barrel. By end-2021 Brent is expected to rise to $64 per barrel and WTI to reach $61 per barrel.

EIA, on the other hand, sees 2021 Brent spot prices averaging $52.70 per barrel and 2021 WTI spot prices averaging $49.70 per barrel.

The EIA said in its January short-term energy outlook (STEO) report that oil prices are further expected to increase in 2022. According to the STEO, Brent spot to average at $53.44 next year and WTI spot to average at $49.81.

The EIA estimates that global consumption of petroleum and liquid fuels averaged 92.2 million barrels per day for all of 2020, which it said was down nine million barrels per day from 2019. The organisation expects global liquid fuels consumption will grow by 5.6 million barrels per day in 2021 and by 3.3 million barrels per day in 2022.

The EIA also estimates that global liquid fuels inventories rose at a rate of 6.5 million barrels per day in the first half of 2020 before declining at a rate of 2.4 million barrels per day in the second half of 2020. It forecasts that global inventories will continue to fall, declining at a rate of 0.6 million barrels per day this year and 0.5 million barrels per day next year. US crude oil production is estimated to have fallen from the 2019 record level of 12.2 million barrels per day to 11.3 million barrels per day in 2020. The EIA expects that annual average production will fall to 11.1 million barrels per day this year before rising to 11.5 million barrels per day in 2022.

The EIA noted that its January STEO remains subject to heightened levels of uncertainty because responses to Covid-19 continue to evolve.

“Reduced economic activity and changes to consumer behavior in response to the Covid-19 pandemic caused energy demand and supply to decline in 2020,” the EIA said.

“The ongoing pandemic and the success of vaccination programs will continue to affect energy use in the future,” the EIA added.

Last week, oil prices fell sharply on concerns that demand would be lower as Covid-19 continues to rage globally.

“The recent resurgence in coronavirus infections, appearance of new variants, delayed vaccine rollouts and renewed lockdown measures in most major OECD economies has clouded the economic and demand recovery,” said Stephen Brennock of oil broker PVM.

US crude recently fell 2.73 per cent to $52.11 per barrel and Brent was at $54.87, down 2.75 per cent on the day.

issacjohn@khaleejtimes.com