With demand mounting and global supply in catch-up mode, oil prices are likely to climb in the second half of 2021 and hold strong for several years, as economies around the world recover from the coronavirus pandemic and drive up energy needs, analysts at Raymond James & Associates Inc. said Monday.
The analysts, including John Freeman and Pavel Molchanov, estimated in a report that West Texas Intermediate (WTI) crude prices – the United States benchmark — would start 2022 at $80/bbl and average $75 over the course of next year. That is up notably from the team’s March forecast of $60 to start 2022 and a $58 average for the year.
Notably, the Raymond James team expects the WTI average to hover around $70 over the subsequent five years.
“In order to reach a balanced market by the end of 2022 (and beyond), pricing will need to be at sufficiently high levels to spur the industry to get out of its austerity mode,” the Raymond James analysts said.
WTI prices topped $75 this summer but trended down in trading Monday to around $71. “But it remains close to the highest levels since 2018,” the Raymond James analysts said. “In the grand scheme of things, the oil market is doing just fine.”
While the Delta variant of the coronavirus already is interrupting economic reopening efforts in parts of Asia – outside of China — it also threatens to do the same across other parts of the world, the analysts noted. But to date, they added, robust economic expansions in China, the United States and the European Union – the world’s largest economies – continue amid vaccination campaigns that have proven effective. This is freeing people to travel and propelling demand for fuels derived from oil.
Production, meanwhile, is trailing.
U.S. output averaged 11.2 million b/d for the week ended July 23, down 200,000 b/d from the prior week, according to the Energy Information Administration’s (EIA) latest Weekly Petroleum Status Report. American producers have held fast to vows made over the past year to focus on cash flow and conservative spending. As such, output in the latest week remained well below the early 2020 peak of 13.1 million b/d reached just prior to the pandemic.
Globally, the Organization of the Petroleum Exporting Countries (OPEC) and its allies, aka OPEC-plus, pumped more than 2 million b/d back into the global market between May and July. That was on top of production increases earlier in the year. The cartel last month also agreed to raise output by another 400,000 b/d each month from August to December, and likely well into next year until it unwinds all of the cuts made previously in response to the pandemic in 2020. The cartel slashed output by 9.7 million b/d last year.
In its July Monthly Oil Market report, OPEC said demand this year would increase by 6.0 million b/d to average 96.6 million b/d. It projected demand next year would increase by another 3.3 million b/d to average 99.9 million b/d.
Total products supplied in the United States – EIA’s terminology for demand — averaged 20.6 million b/d over the four-week period ended July 23, up 13% from the same period last year. In that time, gasoline demand averaged 9.5 million b/d, up 9% from a year earlier, while jet fuel consumption jumped 39% to 1.5 million b/d, EIA said.
As the OPEC-plus production process unfolds – and U.S. producers maintain their conservative stance – global oil inventories are expected to fall this year and next, putting upward pressure on prices to induce further production increases, the Raymond James team said.
U.S. commercial oil inventories in the week ended July 23 — excluding those in the Strategic Petroleum Reserve – decreased by 4.1 million bbl from the previous week, according to EIA. At 435.6 million bbl, stockpiles were 7% below the five-year average.
The Raymond James team anticipates more draws domestically and internationally. They forecasted global inventory draws would average 1.6 million b/d in 2021 and 300,000 b/d in 2022.
Given that outlook — which included the expectation that OPEC-plus will have resumed full production by September of next year — the analysts expect U.S. producers to kick back into growth mode next year “as they are forced to pick up the slack as global excess productive capacity goes away.”
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