[Editor’s note: This report is an excerpt from the Stratas Advisors weekly Short-Term Outlook service analysis, which covers a period of eight quarters and provides monthly forecasts for crude oil, natural gas, NGL, refined products, base petrochemicals and biofuels.]


The price of Brent crude oil closed last week at $69.22 after closing the previous week at $69.36. In similar fashion, WTI closed the week at $65.61 after closing the previous week at $66.09. The price movement aligned with our expectation that crude prices would move sideways with profit-taking by the traders after the significant run-up in prices that has occurred over the previous few weeks.

Additionally, as Stratas pointed out last week much of the recent positive news aligned with the expectations of the oil traders. As such, the passage of the 1.9 trillion recovery/stimulus packages, which was signed into law by President Biden on March 11, did not have much impact on the oil markets. The same goes for the ongoing positive news associated with COVID-19 and the vaccinations.

However, the outcome of the OPEC+ meeting that took place on March 4 is providing further support for improving supply/demand fundamentals—and Stratas forecasts that demand will outstrip supply throughout second-quarter and third-quarter of this year.

How much, if any, upside is there for oil prices?

  • There are signs of strengthening demand, and we are forecasting that global oil demand will increase throughout the rest of the year and will average 6.34 million barrels per day (MMbbl/d) more than in 2020. Furthermore, demand in second-quarter, 2021 will exceed demand in second-quarter, 2020 by around 14 MMbbl/d, and demand in third-quarter, 2021 will exceed demand in third-quarter, 2020 by nearly 5.50 MMbbl/d. Stratas’ demand forecast is more bullish than that of IEA (as it was last year—and proved to be closer to reality than the original forecast of IEA), and, therefore, this level of demand could provide further support for oil prices.
  • As pointed out above, Stratas forecasts that demand will continue to outstrip supply over the next several quarters. The forecast reflects our demand expectations, as well as our expectation that the OPEC+ framework stays in place and that U.S. production will have minimal growth this year with production in fourth-quarter being only about 160,000 bbl/d higher than first-quarter of this year.

What could possibly trigger a significant price decline?

  • Obviously, any signs that the supply/demand fundamentals are deteriorating will result in a price correction. This includes a slowdown in demand recovery stemming from a rebound in COVID-19. Our current forecasts are built on the expectation that there will not be another rebound in COVID-19 cases. The risk is that variants of the virus will result in more cases and the need to lock back down, as is happening in parts of Italy. From a supply-side perspective, the OPEC+ arrangement will become more difficult to manage with the higher oil prices. However, as long as demand increases, as expected, there is room for additional supply from OPEC+, which will act as a pressure relief valve. Furthermore, as pointed out above, we expect shale-related production in the U.S. will remain muted.
  • A sell-off in the equity markets is likely to pull down other asset classes—including oil. While there is some risk associated with the high-flying technology stocks, there are underlying factors that provide support for the equity markets—including the accommodating policies of the Federal Reserve – which we think will remain in place through at least the rest of the year. Furthermore, with the economic recovery, there are a range of stocks that will start to be viewed as “buys”—even with (or maybe because of) corrections occurring with the technology stocks.
  • A correction in the oil price could occur just because oil traders decide to sell off to capture the gains of the last several months. While the traders have increased their net long positions since November, their positions are significantly less bullish than during the last major run-up in prices that took place in 2018.

Taking the above into consideration, Stratas still holds the view that there remains some additional upside to oil prices over the next two quarters, but the upside is now moderate after the significant run-up that has occurred so far this year. The major downside risk centers around COVID-19 and any related interruption in the economic recovery. Without this type of disruption, we think a major price correction is unlikely.

WAOP

About the Author:

John E. Paise, president of Stratas Advisors, is responsible for managing the research and consulting business worldwide. Prior to joining Stratas Advisors, Paisie was a partner with PFC Energy, a strategic consultancy based in Washington, D.C., where he led a global practice focused on helping clients (including IOCs, NOC, independent oil companies and governments) to understand the future market environment and competitive landscape, set an appropriate strategic direction and implement strategic initiatives. He worked more than eight years with IBM Consulting (formerly PriceWaterhouseCoopers, PwC Consulting) as an associate partner in the strategic change practice focused on the energy sector while residing in Houston, Singapore, Beijing and London.