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Oil prices may temporarily rise to $80 a barrel or more this summer as demand recovers.
The economy, which has reopened since the beginning of the year, has already shipped about 40% of crude oil, but an increase in driving by Americans, as well as increased freight transport and air travel, could put further pressure on prices.
For consumers, this means the early summer peak in gasoline prices could come later in the season. According to AAA, unleaded gasoline averaged $3.04 a gallon Wednesday, nearly a penny higher than last week, but up 50% from a year ago.
Brent Futures, The international crude benchmark rose 1.6% to $71.48 a barrel on Wednesday, the highest level since January 8, 2020. West Texas Intermediate Futures for July were 1.6% higher at $68.83 a barrel, after hitting a high of $69.65, the highest since October 23, 2018.
“Demand is growing very fast because everyone is driving, and we have Europe to reopen, which is really starting to happen,” said Francisco Blanche, global commodity and derivatives strategist at Bank of America. “India seems to have hit an inflection point, in terms of matters, which in my mind could mean you get a return to mobility as well.”
Energy analysts agree that the world is in for a period of high prices, but they do not agree on how high or for how long. Blanche said Brent has already hit his $70 target for the quarter, but he has a more bullish long-term outlook than others.
“We think we can again see $100 a barrel in the next three years and we’re sticking to that. That will be the story of 2022, 2023,” Blanche said. “Part of it is that we have all the cards like OPEC, and the market is not particularly price sensitive on the supply side and there is a lot of demand… We have a lot of inflation everywhere. Oil economy lagging behind the increase in prices.
OPEC members and their allies, a group known as OPEC+, are slowly returning oil to the market. They agreed to implement their previously planned production increase of 350,000 barrels in June and to 450,000 barrels a day starting in July. Saudi Arabia also agreed Back off your cut of about a million barrels a day, which was ranked first in the year.
OPEC+ agreed in April to increase production by more than 2 million barrels per day by the end of July.
US industry is producing about 11 million barrels a day, up from about 13 million barrels before the pandemic. But analysts say it is not clear how fast US companies will restore that production.
“Capital discipline has led to a decline in the sensitivity of producers to changes in prices,” Blanche said. He said companies are under pressure to be cautious about how they use capital after the fall in prices last year.
“Right now we’re in a position where prices are going up, companies are reluctant to invest,” Blanche said. “They’re paying off debt and raising dividends.”
There is also pressure on corporate boards to sell hydrocarbon assets and work towards net zero on carbon emissions by 2050, he said. “You have two major forces hindering capex in the energy sector,” Blanche said.
For now, oil production has not been keeping up with demand, as global economies have recovered. Oil prices continued to rise even after OPEC+ committed to return crude to the market on Tuesday.
“Welcome to the post-pandemic world,” said Daniel Yergin, vice president of IHS Markit. “We are seeing demand for 7 million barrels per day growing rapidly between Q1 and Q3.”
Yergin said his Brent target this year is an average of $70 a barrel.
“There is an incredible case where the price of oil can reach $80, but there will be a backlash. It will start to affect demand and there will be a political backlash to that,” Yergin said. “You’ll start seeing phone calls happen. [President Joe] Biden has long been in politics to learn that high gasoline prices are always a problem for the president. This is also true in the era of energy transition.”
Demand has increased so much that analysts expect the market to be able to absorb an additional million barrels a day of Iranian production, as demanded by the Biden administration, should it return to its previous commitments on its nuclear program. But when this might happen is uncertain.
“The return of the Iranian barrel has failed to produce a major diplomatic breakthrough for the oil market with the fifth round of nuclear talks in Vienna,” wrote Helima Croft, Head of Global Commodities Strategy at RBC.
Croft said that The International Atomic Energy Agency’s verification of Iranian enrichment activities appears to be one of the issues that must be resolved before the Biden administration can provide sanctions relief.
“With the Iranian election season in full swing, it now looks like a return to those sanctions restricted barrels will be a topic of summer discussion for OPEC,” he said.
Croft said it is also important who becomes Iran’s energy minister after the election. The current minister has supported a systematic return to the oil market.
“How they return will be important and we are watching closely what will happen with their floating storage which is growing,” she said. Croft said that if Iran’s oil is not restored in a stable manner, it could shake the market and temporarily lower prices. The market will react “if it’s going to show a shock and astonishment by virtue of dumping all their temporary storage.”
separately, Iran’s largest naval ship Khargo It sank after a fire broke out in the Gulf of Oman on Wednesday. According to Iran media, the crew was reported to be safe, and no other explanation was given for the incident.
According to John Kilduff of Again Capital, bullish demand and price forecasts supported the upside in crude oil prices this week. He said OPEC predicted demand could reach 99.8 million barrels per day by the end of the year, but supply is expected to reach only 97.5 million barrels per day.
“I’ve been bullish for a while now,” Kilduff said. He expects Brent to hit $80 a barrel and WTI trade between $75 and $80. “Demand trends are exploding … I imagine the real thrust will come as we get closer to Labor Day.”
Kilduff said the key to the long-term outlook is that the US shale industry resumes its former activities and moves forward.
Lee expects American drillers to eventually return to their former levels of production, but he noted a change in attitude.
“If you split them, private companies are reacting faster. Public independents and large companies are much more cautious,” he said.
OPEC+ currently sees no threat from the US, and has additional production capacity to curb higher prices and add supplies if needed. First, higher prices would be an invitation for the US shale industry to pump more, which in turn could drive prices down.
“They don’t see American producers coming back very strongly at this point in time, and I think their view is that American producers won’t come back strong,” he said. “In terms of how they’re behaving now, they’re not worried about Shell right now, so they’re more inclined to stop production.”
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