New York September 30 2021: Gas-to-oil switching and improving demand in Asia amid tighter inventories could boost crude prices, currently at a three-year high, through October, before increased supply from the OPEC+ producer grouping and elsewhere limits upside, S&P Global Platts Analytics said in a recent report.
The physical Dated Brent crude benchmark assessed by S&P Global Platts hit a three-year high this week at $79.12/b as analysts rushed to upgrade their oil forecasts amid a futures market flirting with $80/b.
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Dated Brent prices should average somewhere in the upper $70s/b in October and it is quite possible that they may rally during this time, Platts Analytics said in its World Oil Market Forecast on Sept. 28.
"The most important feature in our outlook remains the transition from Atlantic Basin oil demand growth to the expected pick-up in Asian demand growth, particularly in Q4," Platts Analytics said.
Prices would then drop back toward $70/b as market tightness eases into 2022, with Platts Analytics noting that should supply remain severely disrupted, OPEC+ could raise quotas by 800,000 b/d, double current plans for November.
Other top analysts also revised their views, with Goldman Sachs raising its forecast for year-end Brent oil prices by $10/b to $90/b given the slow recovery from the supply impact of Hurricane Ida in the US and a stronger demand recovery.
Analysts at MUFG maintain a bearish oil price profile along the curve, forecasting Brent at $64/b at the end of the year, but acknowledge that the global gas crunch could lead to a tightening physical oil market. "We do not rule out a transitory price spike north of $85/b in Q4 2021," they said in a research note Sept. 23.
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UBS analysts noted it is only a matter of time before pressure builds on OPEC+ to take action also limiting higher prices.
"A near-term retest of the October 2018 highs in Brent cannot be excluded… that said, sustained Brent prices above $80/b might also result in more consumer nations requesting OPEC and its allies to open their production taps faster," it said on Sept. 28.
The next OPEC+ meeting is scheduled for Oct. 4 and, if oil prices continue to rise, the alliance will need to decide whether to stick to its scheduled production increases of 400,000 b/d a month or ease back their historic output cuts.
The oil market structure is one that discourages storage and reflects a picture of a tighter near-term market and easing further out. The forward curve for ICE Brent futures has held in a steep backwardation through recent months, with the December 2021 contract trading nearly $7/b above the December 2022 contract in the week beginning Sept. 26.
Other derivative contracts have shown a similar trend, with an even steeper structure in a Dated Brent forward curve calculated using ICE Brent futures and Dated to Frontline swaps.
A look at the energy-heavy S&P GCSI Commodity Index, which closed Sept. 28 at 557.61, shows it is now up to levels not seen since 2014, even if it is still 0.79% below its 10-year return.
However, there are a number of oil market variables that could change the course of supply and demand side fundamentals.
Iran has the capacity to bring back crude quickly but nuclear talks with the US have been slow going. A lack of progress on Iran-US negotiations means the market is scaling back expectations of a potential return of 1.5 million b/d in crude that is keenly bought by the big Asian consumers. Platts Analytics now assumes a deal in Q1 2022, with full sanctions relief not until April 2022.
Meanwhile, Platts Analytics notes that attention to risk now focuses more on supply-chain constraints, inflation trajectories, geopolitics, and central bank policies, and less on coronavirus trends, per se.
Financial contagion and broader fallout from China's Evergrande debt crisis remain a demand side concern. With regard to fallout from the world's most indebted developer, Platts Analytics said "performance of property related equities on Hong Kong's Hang Seng market is an important signpost, while China aviation, subway traffic, and holiday spending remain other key indicators."