Q3 Outlook: High price volatility is expected in the crude oil market

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Vrasidas Neofytou
Head of Investment Research

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Q3 Outlook: High price volatility is expected in the crude oil market

It has been a phenomenal year for the energy commodities sector so far, having surged by almost 25% in Q2 and up 50% year-to-date thanks to strong post-pandemic fuel demand and tight supplies, with crude oil becoming the hottest commodity on Wall Street. 

US-based West Texas Intermediate Crude (WTI) topped to near $77 per barrel in early July, hitting a 7-year high, whilst Brent crude, the international benchmark, climbed to $78 per barrel in the same period, posting a 3-year high. 

The rally was mostly driven by the successful vaccination campaign around the world, which allowed governments to gradually ease the pandemic-led lockdown measures, coupled with the historic production cuts from the OPEC+ alliance and a large drawdown in global crude inventories.  

Furthermore, the massive central bank monetary policies, cheap liquidity, government fiscal stimulus, and zero-interest rates have exploded the inflationary pressures that lifted oil prices over the first half of the year. 

Yet, oil prices started retreating from their multi-year highs at the start of Q3, following an agreement within the OPEC+ group of producers to boost output, while the unexpected outbreak of the highly contagious “Delta” covid variant deteriorates the oil growth demand in the short term. 

Crude oil rally reached our yearly and Q2 2021 price targets: 

Our price prediction has come to fruition as crude oil prices reached our price projection of $75 per barrel in Q2, 2021 (Bullish scenario for Q2), anticipated back in early April when prices traded around $60 per barrel, 20%-25% lower.  

The bullish projection for Q2 was based on the rapid rate of COVID-19 vaccinations, fiscal and monetary stimulus, and the recovering fuel demand driven by the resumption of global trade, traveling, manufacturing, and tourism around the world. Here is the link to the Q2,2021 Outlook: https://exclusivecapital.com/research/quarterly-outlook/q2-outlook-2021-crude-oil/  

Our accurate prediction comes after we also forecasted, back in December 2020 (when the oil prices hovered around $45 per barrel), that crude oil prices could top $70 per barrel, up 55%. Here is the link to the Yearly Outlook 2021: https://exclusivecapital.com/research/quarterly-outlook/q1-outlook-2021-growth-led-commodities/  

Neutral crude oil outlook for Q3, 2021: 

While crude oil prices have topped to the near $80 mark in the first half of 2021, there is no guarantee the rally will continue into Q3 since the growing concerns for more OPEC+ supplies and the resurgence of Covid outbreaks around the world could have a more significant impact in the overbought oil prices. 

Therefore, we have turned our Base case scenario from Bullish to Neutral, with oil prices averaging to near $70 per barrel, expecting Q3 to be a transition phase to test the waters for the energy markets. 

3-month targets: 

Base case scenario: Neutral: We expect crude oil prices to consolidate near $70 per barrel or to remain volatile between $65-$75 per barrel in the third quarter until there is clarity on the oil market landscape.  

The uncertainty around the OPEC+ production deal, and the possibility of a new market share battle by top oil producers, loom over the energy market.   

In addition, the renewed lockdown measures to curb the spread of the “Delta” variant around the world and the higher oil prices could start to destroy demand growth for petroleum products such as gasoline, diesel, and jet fuels. 

Bullish scenario: We anticipate that crude oil prices could break above $80 per barrel, assuming Covid outbreaks do not slow down the global demand recovery, whilst the falling oil inventories, the tight supplies, the massive monetary and fiscal policies, the re-opening and reflation bets, could push oil prices towards fresh multi-year highs. 

Supporting the bullish oil outlook, OPEC sees a tight energy market in the next quarters, with global oil demand reaching pre-pandemic levels of 100 million bpd in 2022, driven by strong economic growth from top-consuming countries such as China, India, and the USA.  

Hence, the International Energy Agency (IEA) predicts that global oil consumption will rebound by 5.4 million bpd in 2021 and rise by another 3.1 million bpd in 2022, on solid global fuel demand. It also estimates a 1.5 million bpd supply deficit for the second half of 2021, indicating a tight market despite the gradual OPEC supply boost. 

We additionally expect the Federal Reserve and other central banks to continue their “accommodative” massive monetary and fiscal stimulus into Q3, supporting the global economies and improving the demand for petroleum products. If the global economy is in a decent position to keep recovering from the pandemic, then crude oil prices should benefit as well. 

Hence, oil prices could find strong support on tight supplies since the US crude stockpiles have fallen to a 2-month low, while the global crude inventories have seen the largest draws in a decade. 

The bullish scenario also assumes that Investors will continue placing funds into cyclical and energy sectors as the global economy re-opens from the unprecedented pandemic, while some passive funds will bet on inflation-sensitive assets, such as crude oil, as a hedging tool against rising inflation rates (reflation bet). 

Bearish scenario: We expect crude oil prices to fall back to $60 per barrel assuming the highly transmittable “Delta” covid variant could trigger new lockdown that would likely reduce demand for petroleum products, while we are concerned that the OPEC+ alliance will increase production above projected global demand.  

Saudi Arabia and the United Arab Emirates have reached a compromise on the production deal in mid-July, with UAE increasing its baseline production from today’s 3,170 million bpd to 3,5 million bpd from May 2022. 

Overall, the OPEC and its non-OPEC allies led by Russia, known as the OPEC+ alliance, will increase production by a further 2 million bpd from August through to December 2021, 400k barrels daily each month over the next five months.  

We would also pay attention to another bearish catalyst for the oil market in Q3, which would be the comeback of the US Shale oil production. With oil prices trading above $70 per barrel, U.S. crude production has started slowly increasing to near 11.5 million bpd in mid-July, the highest since May 2020. 

Meanwhile, the prospect of a quick return of Iranian supplies to global markets has arisen since the restart of negotiations over the revival of the 2015 nuclear deal. An estimated 2 million bpd of Iranian crude is excluded from the market due to sanctions, while in case of a deal, Iran may supply between 0.5 and 1 million bpd to global markets. 


Surging crude oil prices may threaten global economic recovery after the pandemic and damage the oil growth demand. The cure for high prices in the commodity sector is always high production, and there would be no exception for the crude oil market.  

With WTI and Brent crude oil prices trading within overbought territories of $70-$80 per barrel, we expect that it would trigger a rapid rise in production from OPEC+ members and US Shale oil producers. Inventories will begin to build up, and consumers will start seeking substitutes (green-renewable energy), and the “Delta” variant will start weighing in on oil prices, putting an end to the bullish oil price upward momentum in the third quarter of the year, despite surging oil demand.  

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