In the near term, oil may surpass $ 60 a barrel as the market goes into deficit for the first time since 2017 on an annual basis, analysts at JP Morgan Bank noted in a client review published the day before. The deficit in the oil market will begin to be felt in February, and by the end of the year it will already be very noticeable. If OPEC does not intervene and increase production, oil prices will skyrocket up to $ 80.
Is this oil price forecast justified or is it overly optimistic? Nikolay Dudchenko, an independent financial analyst, answered a question from Fortrader magazine.
– Let’s start with the main thing. I do not believe in the oil price around $ 80 per barrel. At least not this year. Despite the fact that in the previous review, our view of the oil price was optimistic, I always try to refrain from too extreme estimates and recommend to act according to the situation. The price of $ 80 for a BRENT barrel at this stage seems completely unrealistic and there are several reasons, both fundamental and technical.
1. OPEC Treaty
As you know, at the end of last year, the cartel countries agreed on a gradual increase in production in the first quarter of this year. However, already on 05.01 at a regular meeting, the participating countries came to an agreement on the need to extend the current level of reduction in February and March, and only Russia and Kazakhstan allowed to increase production. At the same time, Saudi Arabia will cut production to compensate for these indulgences. The very fact suggests that the cartel has little faith in strong demand growth, especially in the first quarter of 2021. Moreover, the UAE Minister of Oil also announced that the demand for oil will remain low (below the pre-crisis level).
2. Economic recovery and pandemic
In our previous review on oil, we have already analyzed that the growth of world economies is often accompanied by an increase in oil prices. And, given that the global economy is projected to grow by 5-5.5%, it is logical to expect a gradual transition of the BRENT oil price to a bullish trend. However, let us remember once again that even in the most “fat” years (2010-2011 and further 2017-2018), the growth of the BRENT price did not exceed 20% compared to the previous year. In 2018, the price dropped altogether. The rally of the BRENT price in 2017 began only after a correction from $ 58 to almost $ 44, only after that the price managed to return to the bullish trend and reach a maximum of $ 66.8 (an increase of 52%). In 2017, global GDP grew by more than 5%.
The conclusion suggests itself as follows: growth by 50% from current levels (i.e. from $ 50-55 to $ 75-80) is possible only with a very optimistic scenario.
And here we again need to remember about the coronavirus, which has already set the teeth on edge. Now let’s turn our attention to the world. Here are just a few examples:
- In Germany, Merkel expects lockdown extension until April;
- Austria extended restrictions until February 7;
- Scotland has introduced a lockdown. The UK tightened restrictions at the end of 2020;
- Turkey has introduced a partial lockdown;
- Restrictions were introduced in 11 regions of China;
You have to be very naive, if you believe that the situation can be resolved at once and all economies will immediately start to “add up”. Conclusions: yes, the demand for oil is growing, but for how long and how much will it grow?
For example, Platts Analytics estimates that the demand for oil refining will grow within two years to 167 thousand barrels per day per year, but this is much lower than the average for five years (about 800 thousand barrels per day per year). The Wall Street Journal reiterates that “world oil consumption will recover to the 2019 level only by the end of 2021 – early 2022”. Those. skepticism about rising demand is not just speculation.
3. Growth of shale production
The BRENT price exceeded the $ 50 mark again made shale oil production profitable. However, here, according to forecasts by IHS Markit, this is unlikely to lead to an increase in production, but passing the $ 60 mark may lead. Another question is that the recovery of production will take several months for American companies, but the fact is that as the price rises, the pressure on the market will increase.
4. Derivatives for oil
With regard to BRENT calls with a strike price of $ 80 and expiration in December of this year, the delta for such options is minimal at 0.0492, confirming that at the moment traders are absolutely sure that the price is below the specified level.
The technical picture of the oil market
From a technical point of view, as we discussed in our previous large review, the trend line formed by the highs from 03.10.2018 and 08.01.2020 becomes an obstacle to price movement higher.
Thus, the target of the upward movement is the range of $ 60- $ 62.5. It doesn’t seem to me that it will be very easy for the bulls to overcome this cluster (i.e., in fact, to break the trend). However, even if this happens, it will only be after the correction. In addition, if we recall our wave analysis, then the implementation of the optimistic scenario (the assumption that the oil price is in a trend impulse) should bring the price to a level around $ 76 (the end of the 5th wave of the impulse), but hardly higher.