Despite fears about the Omicron variant of the coronavirus and rising global oil output, Raymond James Financial Inc. analysts are increasingly optimistic about strong crude prices through 2023.

Raymond James Outlook

“Our bullish oil view over the next few years not only remains firm, but we’re actually increasing our long-term price forecast,” the analysts, John Freeman and Justin Jenkins, said in a report Monday.

Freeman and Jenkins noted that, early in December, the new variant raised fresh demand worries across oil markets. At the same time, the Saudi Arabia-led Organization of the Petroleum Exporting Countries (OPEC) and its Russia-led allies, aka OPEC-plus, agreed last week to boost production by 400,000 b/d in January, continuing a pace of monthly supply increases the cartel began in August.

Those developments followed U.S. President Biden’s announcement in late November that his administration would release 50 million bbl of crude from the Strategic Petroleum Reserve (SPR) in a coordinated effort with China, Japan, India and other countries to bolster global supplies. What’s more, U.S. production for the week ended Nov. 26 reached 11.6 million b/d, the highest level of 2021.

“The past few weeks seem like an eternity in the oil market with fears of the new Omicron COVID variant, global SPR releases, and OPEC-plus drama grabbing the headlines and pushing” West Texas Intermediate (WTI) crude prices from near $85/bbl last month to below $70 to start the current week, the Raymond James analysts said.

But a combination of low global inventories, ongoing demand increases and modest U.S. production relative to pre-pandemic levels should support WTI prices over the next couple of years, they said. While up this year, U.S. output remains about 1.5 million b/d below the early 2020 peak, prior to coronavirus outbreaks, according to Energy Information Administration (EIA) data.

Against that backdrop, the Raymond James team envisions WTI prices starting 2022 at $70 and averaging $75 for the year. They expect the U.S. benchmark to reach $80 by the final quarter of next year and hold at that level in 2023. The average price estimate for 2023 is up notably from $70 in a previous forecast.

Prices “need to move meaningfully higher” to “incentivize enough supply growth to reach a roughly balanced oil market by the end of next year and for 2023,” Freeman and Jenkins said.

“While the spreading Omicron variant remains a demand concern in the short run, we certainly do not expect anywhere near the same level of lockdowns (or demand impact) as we saw with prior waves, and overall we remain bullish on medium/longer-term growth,” they added.

The analysts estimated global demand would average above 100 million b/d for 2022 – on par with pre-pandemic levels – and reach 103 million b/d in 2023. While OPEC-plus is boosting output, the Raymond James team expects its spare capacity to prove “exceedingly tight” by 2023. At the same time, publicly traded U.S. producers, under pressure from investors to invest in renewable fuels, are expected to stick with modest crude production increases.

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“U.S. production growth in 2022 and 2023 remains subdued relative to prior bullish cycles given producer discipline,” Freeman and Jenkins said. “With a more or less normal demand environment in 2022” and trailing output, the “oil futures strip has to move substantially higher” to balance the market over the next two years.

Rystad Energy analyst Louise Dickson noted that, after declines last week amid Omicron worries, WTI and international benchmark Brent crude prices rebounded Monday and Tuesday.

“The oil market seems to now be convinced that higher price levels are warranted,” she said.

Dickson said a decision over the weekend by state-owned Saudi Arabian Oil Co., aka Aramco, to raise its prices for January oil delivered to Asia reflected strengthening demand and provided added price support.

“The Saudis are notably bullish about the oil demand recovery,” she said.