A continued recovery in global oil demand should lead to higher prices going forward, but growth in output may be restrained in 2022 as producers continue to prioritize the balance sheet, Moody’s Investors Service said Thursday.

Other analysts also expect to see oil prices climb, as mobility throttles higher and economies recover from the deep impacts associated with the pandemic.

“We have increased our medium-term oil price range to $50-70/bbl to reflect our expectation that the full cost of production of a marginal barrel of oil will keep increasing in step with a continued recovery in demand,” said the Moody’s team.

Senior Vice President Elena Nadtotchi said, “We are now returning to the medium-term price range we had before the coronavirus pandemic as we expect the cost of production to continue to rise in step with recovery in demand. We also expect that restricted supply will continue to support strong momentum in oil prices.”

The upstream sector “continues to invest well below pre-pandemic levels despite the sharp turnaround in oil and natural gas prices in 2021,” Moody’s noted. “Exploration and production (E&P) companies are signaling continued spending restraint in 2022.”

Following a steep 30% cut to upstream spending in 2020, capital expenditures have risen “only slightly,” the credit ratings analysts noted. E&Ps “are still planning to invest conservatively in 2022, but we expect modest spending growth on the back of high commodity prices.”

The Moody’s analysis “demonstrates that upstream companies will need to increase their spending considerably for the medium term to fully replace reserves and avoid declines in future production,” said Vice President Sajjad Alam.

The large independent E&Ps,along with integrated majors and national oil companies, “will all keep production disciplined through 2022, boosting supply gradually to match returning demand with the pace and scope of production increases varying by company and region.”

How Much Is Brent Oil?

Morgan Stanley Research analysts noted Wednesday that Brent was sitting near $80, up two times from a year ago. 

“Observable inventories have declined at a steady draw-rate of 1.9 million b/d thus far in 2021,” said the Morgan Stanley analysts. “By now, all the excess inventories built up in 2020 have been eroded, and more, hitting new five-year lows in key markets including the U.S. 

“Looking ahead, mobility stats are improving and refining margins are expanding, supporting a further recovery in demand amid a backdrop of constrained supply.”

The Organization of the Petroleum Exporting Countries and its allies, aka OPEC-plus, recently affirmed a plan to increase crude production through November by another 400,000 b/d. The cartel stopped short of boosting output further, a decision that fueled supply concerns and sent oil futures to seven-year highs.

Standard Chartered followed with a higher oil price forecast. The 2021 Brent forecast was hiked by $6 to $71. The 2022 Brent forecast is $8 higher or $67.

“We think the market has concluded that OPEC-plus does not see $80/bbl as a ceiling and that it is unlikely to cool prices in the short term,” the Standard Chartered analysts said. “Ministers have not challenged a market narrative that assumes tight balances and an associated lack of spare capacity; as a result, prices are likely to remain elevated for longer.”

“The implication that OPEC-plus is not yet overly concerned about negative demand effects also suggests to us that it will defend a higher price floor than we previously thought.”

The Fitch Solutions team also raised its outlook for Brent for the next four years. Near-term price forecasts mirror those of Standard Chartered. Brent is forecast by Fitch to average $70 this year and $67 in 2022. In 2023, Brent is predicted to average $68, rise to $70 in 2024 and then to $73 in 2025. 

Rystad Energy’s Louise Dickson, senior oil markets analyst, noted Thursday that oil prices were “hit with bearish news from both sides of the Atlantic,” falling on the “prospect of more supply being available in the U.S. market and from the gas rally taking a break after Russia stated it’s ready to boost flows.”

U.S. petroleum demand has been rising, but strong crude production and imports ended up driving domestic inventory gains for a second straight week, the Energy Information Administration (EIA) said Wednesday. 

For the week ending Oct. 1, EIA said U.S. oil inventories, excluding those in the Strategic Petroleum Reserve (SPR), increased 2.3 million bbl. A week earlier, stocks climbed 4.6 million bbl.
The United States was said to be considering a release from the SPR, but it would “definitely be a short-term step to relieve the current tight market, which has been the main cause of the oil price surge in recent weeks,” Dickson said. China recently released volumes from its SPR to reduce prices.  

“A coordinated, or uncoordinated but simultaneous effort by the U.S. and China, can have a short-term market impact, but the real lifting will eventually have to come from OPEC-plus,” Dickson said. With the cartel’s control over “95% of global spare oil production capacity,” it “holds the most influential lever of easing oil prices.”