Brent Price to Hit $75/Barrel, IEA Expects Fragile Rebalancing

Brent Price to Hit $75/Barrel, IEA Expects Fragile Rebalancing

Brent crude price has been projected to hit $75 per barrel just as the United States International Energy Agency expects a fragile rebalancing in oil market in 2021.

Morgan Stanley forecast Brent crude prices to climb to $70 per barrel in third quarter while Barclays forecasted $67 for the year.  

On its part, Goldman Sachs raised its second (Q2) and third quarter (Q3) price forecasts, expecting Brent Crude prices to hit $75 a barrel in the third quarter this year.

The firm hinged its estimate on faster market rebalancing, lower expected inventories, and traders hedging against inflation.

On Thursday, international benchmark Brent crude was trading at $66.50 per barrel for a 0.48% decrease after closing Thursday at $66.18 a barrel.

Having maintained uptrend subsequent to global recovery, analysts explained that there are certain downside risks that could make global demand fragile.

On Thursday, Barclays bank upgrades its forecasts for the average price of oil to $67 this year due to lower than previously expected supply from the United States.

Also, the bank increased its 2021 Brent crude oil price outlook by $7 to $62 per barrel and West Texas Intermediate (WTI) crude price estimate by $6 to $58 a barrel.

Prices have been uptrend as the United States International Energy Agency fragile rebalancing projection following recovery from the pandemic year.

The oil cartel production cuts arrangement and unusually high compliance from members has helped price to stay strong.

According to the Organisation of Petroleum Exporting Countries and allies (OPEC+) calendar, its ministers are due to meet in early March to discuss policy for April.

In February, prices trend have been mixed due to Covid-19 vaccines distributions across the globe, as inoculations appear to be slow in African countries, especially.

Also, weather related issue in Texas in the United States impacted demand, though recovery is on the horizon according to oil and gas analysts report.

In a new oil market report for 2021, the United States International Energy Agency is expecting to see a fragile rebalancing following recovery from the pandemic year.

According to the agency, the world oil demand is set to grow by 5.4 million barrel per day (mb/d) in 2021 to reach 96.4 mb/d, recovering around 60% of the volume lost to the pandemic in 2020.

For most part of February, global oil prices have maintained an upward trend, with some analysts projecting $70 per barrel for Brent Crude.

While oil demand is expected to fall by 1 mb/d in the first quarter from already low Q4-2020 levels, IEA said a more favourable economic outlook underpins stronger demand in the second half of the year.

The report however noted that the incorporation of new data lowered the 2019 baseline by 330 kb/d.

Specifically, global oil supply rose 590 kb/d in January, to 93.6 mb/d, as the Organisation of Petroleum Exporting Countries and allies (OPEC+) cuts eased and non-OPEC+ pumped more.

In February, global output is set to fall as Saudi Arabia implements a sizeable voluntary cut.

“The outlook is improving for countries outside the OPEC+ alliance, with an 830 kb/d gain expected in 2021 versus a 2020 loss of 1.3 mb/d”, the report reads.

IEA said refinery throughputs declined by a modest 110 kb/d in December. 1Q21 runs are expected to fall by 1.8 mb/d y-o-y, but annual growth is set to resume from 2Q21 onwards.

“Most of the gains will come from the Atlantic Basin, where refinery activity is recovering from a lower base. In 2020, the Atlantic Basin refinery intake fell to 38.7 mb/d, the lowest in IEA records, which started in 1971”, it said.

The report explained that global implied stock draws accelerated from 1.56 mb/d in 3Q20 to 2.24 mb/d in 4Q20.

In December, OECD industry stocks fell for the fifth consecutive month.

“A monthly decline of 44.6 mb (1.44 mb/d) left inventories at 3 063 mb, 138.3 mb above their five-year average. Products led the fall. OECD crude stocks were 62.8 mb below the May 2020 peak”.

It was noted that January data show continued declines.

ICE Brent crude futures rose above $60/bbl in early February and the 12-month backwardation breached $4/bbl, returning prices to pre-pandemic levels.

IEA then said paper markets drove prices higher, reflecting a favourable overall economic outlook for 2H21 and OPEC+ supply cuts.

It added that physical markets have lagged futures as differentials reflect some delays in clearing cargoes.

Highlights

“The rebalancing of the oil market remains fragile in the early part of 2021 as measures to contain the spread of Covid-19, with its more contagious variants, weigh heavily on the near-term recovery in global oil demand.

“But fresh support has been provided by a more positive economic outlook for the second half of the year, along with a pledge from OPEC+ to hasten the drawdown of surplus oil inventories”, IEA said.

It then noted that the prospect of tighter markets ahead lifted benchmark crude oil prices to one-year highs in early February, with Brent trading at $60/bbl and WTI at $57/bbl.

Renewed lockdowns, stringent mobility restrictions and a rather slow vaccine roll-out in Europe have delayed the anticipated rebound until the second half of the year.

Recalled that in its January update, the International Monetary Fund raised the global GDP growth forecast for this year to 5.5% from 5.2% as the robust recovery in manufacturing activity and stronger growth expectations for the United States offset near-term weakness.

“We revise down our global demand estimate for 2021 by 200 kb/d, to 96.4 mb/d, following adjustments to historical data, but growth remains largely unchanged at 5.4 mb/d year-on-year.

“The forecasts for economic and oil demand growth are highly dependent on progress in distributing and administering vaccines, and the easing of travel restrictions in the world’s major economies”, IEA stated.

Amid the uncertain outlook for oil demand, OPEC+ has reiterated its readiness to help eliminate the massive oil stock overhang that built up last year.

Data shows that inventories have been steadily declining since 3Q20 but December OECD stocks were still 140 mb above their five-year average.

It added that the current production policy of the group calls for most members to hold supply steady through March.

Meanwhile Saudi Arabia has promised to cut an extra 1 mb/d in February, while OPEC+ ministers are due to meet in early March to discuss policy for April.

Outside of the OPEC+ group, producers are responding to higher prices, albeit cautiously and from a low level.

Led by the prolific Permian Basin, US drilling and completion rates have risen steadily in recent months.

Oil prices climb on improve demand in United States

“While investor guidance published to date suggests operators will stick to financial discipline and reward shareholders in 2021, at current prices there is clearly potential for some producers to respect those engagements and modestly increase their capital expenditures.

“For now, though, we expect US crude oil supply to hold broadly steady in 2021 at around 11.2 mb/d after falling by 940 kb/d in 2020.

“Canada, now pumping at record rates, has restored nearly all the volumes shut in at the height of last year’s demand collapse.

“Total non-OPEC+ supply will rise by 830 kb/d in 2021 versus an annual decline of 1.3 mb/d in 2020.

“With demand forecast to rise strongly and still modest growth in non-OPEC supply expected, a rapid stock draw is anticipated during the second half of the year”, IEA said.

The agency added that this sets the stage for OPEC+ to start unwinding cuts even if producers outside the group to ramp up faster than currently projected.

Earlier this week, Bank of America raised its average price outlook by $10 a barrel from its previous projection and said Brent prices could hit $70 in the second quarter of 2021, while they are set to average $60 this year.

Morgan Stanley also sees Brent touching the $70 mark this year, but a bit later—in the third quarter, expecting “a much-improved market,” including on the demand side.

Brent Price to Hit $75/Barrel, IEA Expects Fragile Rebalancing