Oil price forecast: Uncertainty leaves analysts divided
There is disagreement on an oil price forecast with some predicting a surge, others a fall
Uncertainty is dogging anyone trying to make an oil price forecast, with the COVID-19 pandemic continuing to make its presence felt. The Organisation of the Petroleum Exporting Countries’ (OPEC's) monthly oil market report for September brought this into sharp focus.
Although global economic growth is forecast at 5.6% for 2021 and 4.2% in 2022, clouds still linger on the horizon. The authors noted that the spread of COVID-19 variants could necessitate further lockdowns, and even cause vaccines to be less effective.
While the roll-out of jabs has proceeded at pace in Western economies, progress has been much slower in the developing world. A number of politicians have warned that just 2% of people in low-income nations have been vaccinated, and without a global effort, the pandemic could be much harder to bring under control.
Other factors affecting the oil forecast
Other factors weighing heavily on the oil forecast include global supply-chain issues, an unpleasant cocktail of logistics challenges and labour shortages. Mother Nature has not helped either, with Hurricane Ida disrupting up to 95% of crude oil and gas production in the Gulf of Mexico.
According to the OPEC report, August saw crude oil spot prices suffer their largest monthly drop since September 2020. While demand in the US and Europe is showing “signs of strength”, this has been offset by softening demand in several large Asian countries, with lockdown measures and mobility restrictions being imposed in parts of Japan and China.
When it comes to oil price predictions for 2021, it is worth keeping an eye on how forecasts for global demand are changing. Concerns over increasing COVID-19 cases have resulted in projections for the fourth quarter of this year being revised downwards. This has now been pushed back to 2022, when demand is forecast to rise by 4.2 million barrels per day (bpd) on a year-on-year basis.
“Ongoing improvements in vaccination rates and a potential increase in public confidence in managing COVID-19 is anticipated to be more widespread in 2022, further supporting the recovery of oil demand, particularly transportation fuels. World oil demand is estimated at 100.8 thousand barrels per day (mb/d) in 2022, exceeding pre-pandemic levels,” the report said.
Oil price predictions are also influenced by OPEC. Decisions on production patterns made by its members have real sway, given how these countries are home to almost 80% of proven reserves.
Are US crude oil prices too high?
However, the crude-oil price forecast has been somewhat complicated by a rift that has emerged between OPEC and its allies, and the US.
At OPEC’s most recent meeting on 1 September, members agreed that monthly production should be increased by 400,000 bpd in October, with the Financial Times describing the conference as “one of the shortest meetings in the group’s history”.
But the US is not best pleased with this strategy, with the Biden administration calling for production to be ramped up far faster. US national security adviser Jake Sullivan said last month that the increase fails to offset the reductions that were imposed in 2020, stating that it is “simply not enough” given how the economy is at a “critical moment”.
Sullivan added: “Higher gasoline costs, if left unchecked, risk harming the ongoing global recovery. The price of crude oil has been higher than it was at the end of 2019, before the onset of the pandemic.”
Indeed, China’s government has also taken the unprecedented step of releasing crude from its strategic reserves “to ease the pressure of rising raw material prices”.
Inflation and supply-chain woes
Inflation is proving to be a persistent concern around the world, exacerbated by the stimulus packages introduced by many countries in response to COVID-19, including increasing their money supply.
Added to this, the squeeze on supply chains referred to earlier has caused the prices of everyday goods to rise, not to mention bringing higher petrol prices at the pump.
The latest data from the UK’s Office for National Statistics (ONS) showed that UK inflation hit 3.2% in August, the biggest increase on record. That was on the back of a 5.3% year-on-year increase seen in the US over the same period, which amounted to a modest improvement on the 5.4% witnessed in July.
In the short term, the Energy Information Administration's (EIA’s) oil price forecast indicates that the market will cool in 2022, with production growth beginning to outpace slowing consumption levels.
As of 8 September, it believes next year's annual average for Brent crude will fall to $66 a barrel. With the Biden administration keeping a nervous eye on the situation at the pumps, the White House will be hoping that these projections prove to be accurate.
OPEC has been sticking to its guns when it comes to limiting increases in output even as demand grew, and the lack of supply may have helped push prices further. Issues seen across the global supply chain are also likely to have exacerbated matters, alongside unforeseen events such as Hurricane Ida.
There is a lot of disagreement when it comes to the oil price forecast going forwards. Whereas the EIA anticipates a fall in 2022, other analysts are rather bullish. Goldman Sachs has set a target of $80 a barrel for the fourth quarter of this year, with its analysts stating: “Going into the autumn, we believe oil is the market that is poised to rally significantly.”
Bank of America has gone even further, projecting $100 a barrel for Brent crude by the middle of next year. However, the institution cautioned that such prices depend on whether this winter is colder than usual.
This depends on whether you subscribe to the forecasts given by investment banks, or the view of US officials. Either way, in the longer term, the world is making a concerted push away from fossil fuels, and oil giants are determined to reinvent their businesses by aggressively investing in greener alternatives.
Last year, BP warned that the world may have already seen a peak in oil demand, with the trend hastened by the coronavirus pandemic. A reduced appetite for this commodity would inevitably have an impact on prices.