The oil market bulls are back, but will the rally last?

Oil prices rebounded to over USD 80.0 per barrel in recent days, after fears regarding the impact of the Omicron variant on global demand sent prices freefalling in late November. Since then, concerns have faded just as a flare-up of a number of regional conflicts poses a threat to the supply outlook. 

Although global daily new Covid-19 cases have skyrocketed since the beginning of the year, global daily death tolls have remained relatively moderate, which points to the virus being somewhat less lethal than the Delta variant and vaccines having been effective at reducing the risk of hospitalization, consequently easing investors’ concerns. Moreover, recent optimistic remarks made by several politicians, CEOs and medical professionals have further reduced market risk sentiment for demand. 

Meanwhile, a recent increase in regional conflicts has increased market risk sentiment for supply. Talks between NATO and Russia on the latter’s conflict with Ukraine failed to reach a breakthrough, while in the Middle East, Houthi Yemeni rebels carried out a drone attack on UAE oil facilities. Moreover, concerns that OPEC+ members will be unable to boost oil output fast enough to reach their quota levels—underinvestment has kept production levels below quotas for the past several months—with Libyan supply in recent weeks having suffered notably from significant disruption, further dragged on the supply outlook. 

This week we published our latest commodities forecasts. Our Consensus Forecast, consisting of 30 analysts, forecasts WTI crude oil prices to reach USD 70.0 per barrel in Q4 2022, which is up 3.2% from last month’s forecast. Meanwhile, our panel of forecasters projects Brent crude oil prices to reach USD 73.0 per barrel in the final quarter of this year, representing a 3.3% increase from last month’s forecast. Although prospects for a tighter market have grown in recent weeks, increased output as OPEC+ phases out production curbs will push the market into surplus this year. That said, a worsening of regional conflicts and the Omicron variant—or indeed other new virus variants—pose significant risks to prices, with China reporting its first Omicron case on 15 January. 

Insights from Our Analyst Network

Analysts from ANZ commented on further recent drivers of higher prices: 

“Crude oil futures edged higher as new geopolitical tension added to ongoing signs of tightness across the market. […] This comes as Iran is negotiating with world leaders to try and restore Tehran’s 2015 nuclear deal. Nevertheless, prices remain well supported by a tight physical market. Barrels of oil changing hands are near record high premiums, while the strong outlook is reflected by the market’s bullish backward dated prices structure (where near term futures are higher than longer dated ones). Despite an outbreak of coronavirus cases in China, the market doesn’t appear to be worried about its impact on demand.”  

Analysts from JPMorgan are bullish on prices: 

“The EIA [recently released] its January 2022 Short Term Energy Outlook (STEO) report, which included a material 0.84mb/d revision lower in OPEC capacity forecasts for 2022. Coupled with Bloomberg recently lowering capacity OPEC estimates by 1.2mb/d, we see growing market recognition of global underinvestment in supply. […] We expect consensus capacity forecasts to fall further through 2022, and believe this should drive a higher risk premium to oil prices.”

Disclaimer: The views and opinions expressed in this article are those of the authors and do not necessarily reflect the opinion of FocusEconomics S.L.U. Views, forecasts or estimates are as of the date of the publication and are subject to change without notice. This report may provide addresses of, or contain hyperlinks to, other internet websites. FocusEconomics S.L.U. takes no responsibility for the contents of third party internet websites.

Author: Matt Cunningham, Economist

Date: January 25, 2022