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Crude oil price forecast: are things going to get any better?

The crude oil price forecast predicts a sudden bounce back as the economy returns to normal, but the market isn’t out of the woods yet

In some ways, you’d expect the crude oil price forecast to anticipate sizeable growth in prices – after all, it would be difficult for this commodity to fall any further.

The negative crude oil price trend began when a price war broke out between Russia and Saudi Arabia. Consumption was drying up because of the COVID-19 pandemic. Many oil-producing countries had agreed to cut production, as this would keep prices high and protect revenue. Moscow didn’t agree to the plan, and in response, Riyadh dramatically cut export prices.

Although Russia and Saudi Arabia eventually made a compromise in April, more bad crude oil price news was just around the corner. This time, it was about West Texas Intermediate Oil, otherwise known as 0'>WTI for short. As this name suggests, this oil is extracted in the US and is sent through pipelines to Oklahoma.

Crude oil price news

One reason why the crude oil forecasts has been so dire of late is because of how futures contracts, where buyers commit to purchasing this commodity at a later date, became something of a hot potato when prices began to fall. WTI was hugely oversupplied and underused, and those who were left with the futures contract upon its expiry would actually have to take physical possession of the oil.

No crude oil price prediction could have anticipated that storage space would dry up rapidly, and this meant some seriously drastic action needed to be taken. Volumes of oil stored at sea hit record levels – 60 per cent higher than the previous record that was set in 2009. This helps explain why WTI entered negative territory: with space running out at a rapid rate, oil producers were willing to pay people to take barrels off their hands. Crazy times.

US Crude Oil Spot
Daily change
Low: 31.47
High: 34.03

Unsurprisingly, the price war and the dramatic decline in consumption has also affected 0'>Brent crude, oil’s international benchmark, and the crude oil forecast at large. Prices were consistently trading above $55 per barrel before the pandemic struck. From 17 February to 23 March, they tumbled by 57 per cent to just $24.93. Although there was a brief surge to $31 a barrel as March drew to a close, they slumped again to hit lows of $21.44 on 20 April. To put that into context, we hadn’t seen prices like that since 2001.

Brent Crude Oil Spot
Daily change
Low: 34.31
High: 36.45

What affects crude oil prices?

That’s a very good question – as well as how crude oil prices affect the stock market.

There are several factors that can have an impact on the value of this commodity, known in some circles as “black gold”. However, it is worth noting that crude has been in a downwards spiral for some time. As concerns about climate change have grown, major companies have been pressured to find alternatives to oil that are less damaging to the environment.

As you’d expect, supply is a major factor in the forecast of crude oil prices. If there was only one bottle of 0'>Coca-Cola in the shop on a hot summer’s day, you’d probably be willing to pay top dollar for it. However, if the supplies in the fridge were plentiful, no one in their right mind would be willing to pay a premium. At the moment, there’s a glut of oil on the market, and this has the effect of suppressing prices. Unfortunately, last-ditch efforts to cut production were too little, much too late.

Naturally, demand is another driver. Because of the coronavirus, manufacturing and economic activity has a whole has fallen precipitously, and consumption has tanked. What’s more, the lockdown means that no one is filling up their cars with petrol to go to work. According to the International Energy Agency, almost 10 years of growth in oil demand is going to be wiped out this year.

Other variables are at play too, such as instability caused by attacks on infrastructure – and yes, a price war doesn’t help matters either.

When it comes to how a bleak crude oil price forecast affects the markets, you only need to look at the 0'>Dow Jones and the 0'>FTSE to get an idea of the impact. Energy companies have taken a dramatic dive as their revenues crash, with the likes of BP suffering a 66 per cent slump in profits and a $4bn loss for the financial quarter. 0'>Royal Dutch Shell hasn’t fared much better, and has been forced to cut its dividend for the first time since the 1940s. Airlines are unlikely to benefit because most of them were locked into futures contracts at higher prices – and in any case, few of them are flying much anyway.

You may be wondering, is the dire crude oil price forecast going to have an impact on how much consumers pay for petrol? Unfortunately, probably not by much.

The RAC Foundation has helpfully provided this breakdown that shows what goes into the price of a litre of petrol, which was £1.08 at the time of writing. Just 14p – about 12.9 per cent – is influenced by wholesale prices. The lion’s share goes to the government’s pocket in the form of fuel duty (53.3 per cent) and VAT (16.8 per cent). This helps to illustrate that consumers filling up their tanks actually have very little exposure to the price of oil by the barrel. It may shave a couple of pounds off the cost, but not much more than this.

Crude oil price forecast: What’s next?

So… what is the forecast of crude oil prices looking like now?

Well, the crude oil price forecast in 2021 is actually increasing in the eyes of some. 0'>Goldman Sachs now predicts that Brent crude will hit $55.63 a barrel next year, an upwards revision from the $52.50 it had been forecasting.

Explaining the rationale behind its crude oil forecasts, the Wall Street bank said: “Demand is also beginning to recover from a low base, led by a restarting Chinese economy and inflecting transportation demand in developed market economies.”

UBS has been even more upbeat in its forecast of crude oil price, at least in terms of how quickly they will bounce back.

The Swiss bank is anticipating that Brent crude will rise by 115 per cent come the end of the year, with prices returning to $43 a barrel as economies roar back to life and consumers leave lockdown.

“While the oil market is heavily oversupplied this quarter, we expect it to move toward balance next quarter and become under-supplied in 4Q this year as lockdown restrictions are eased and oil demand picks up,” its chief investment officer Mark Haefele said.

To summarise, things are looking rather bad right now, but the thinking from analysts is that oil prices will bounce back to life as the economy does. That said, no one knows what’s around the corner, and the big risk is a second wave of infections that causes manufacturing and travel to grind to a halt once again.

FURTHER READING: How to invest in oil with little money

FURTHER READING: Tokenised commodities: what you need to know

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