Q4 Energy Outlook: Higher crude oil prices are expected on tight supplies
Head of Investment Research
We maintain our positive outlook on crude oil prices into Q4, 2021, based on the bullish energy market dynamics, the strong economic rebound after the pandemic, the unexpected energy crisis, and the reflation bets from institutional investors.
We expect the current global supply/demand imbalance to deteriorate further since the energy-demanding regions of Asia, Europe, and North America (Northern Hemisphere) are entering the winter season (when heating demand picks up) with crude oil, natural gas, and coal inventories below the 5-year average.
Brent breaks above $80/b reaching our bullish scenario price target for Q3 2021:
For the third quarter in a row, the soaring Brent and WTI crude prices hit our bullish scenario price projection of $80/b in Q3, 2021, anticipated back in June when oil prices traded around $70/b, approx. 10-15% lower than today’s prices.
Brent crude, the international benchmark, topped $83/b in early October, hitting three-year highs, while WTI crude, its U.S. counterpart, retested the psychological $80/b mark, surging to the highest level since 2014.
Both oil contracts had risen by more than 25% in Q3 and almost 60% since the start of the year to date, fully recovering the pandemic-led losses of 2020, when oil prices collapsed to near zero after the “demand shock”, when consumption for gasoline and jet fuels was limited following the Covid-led lockdowns.
Bullish crude oil outlook for Q4, 2021:
Considering the rapidly tightening oil supplies, the weather-linked supply outages, the lower-than-normal oil inventories, and the fast-improving global petroleum consumption (energy agencies project a potential oil demand boost up to 1,5 mmbpd in the next quarters), we revise upward our crude oil forecasts until the end of the year.
Base-case scenario: Averaging between $75-85/b
Our base-case scenario sees both Brent crude and WTI crude oil contracts averaging higher between $75-85/b. (vs. $65-75/b in Q3) during Q4 2021, as the current tight supplies and surging fuel demand are bullish factors for crude oil prices.
Bullish scenario: Crude oil prices at $100/b?
We anticipate that crude oil prices may break above $90/b or even revisit the $100/b psychological resistance level driven by a combination of multiple factors that could affect the supply/demand equation of the market.
Among the possible reasons for a spike in crude oil prices towards $100/b are; a strong oil demand growth following a faster-than-expected economic recovery after the pandemic; tighter energy supplies after some sharp cold spells during the winter heating season; and unplanned weather-led supplies disruptions (similar to the hurricane-led oil and gas outages in the Gulf of Mexico).
OPEC+ output policy supports higher oil prices:
Heading into the final quarter of the year, the supply conditions are bullish for the black gold market, especially after OPEC (Organization of the Petroleum Exporting Countries) and non-OPEC allies led by Russia, known as OPEC+, maintained their output policy agreement.
The OPEC+ alliance decided not to flood the market with more supply and stick to their previously agreed decision in July to raise output by 400,000 bpd a month until at least April 2022, to phase out 5.8 million bpd of existing output cuts.
OPEC+ took this decision despite the political pressure from big oil-consuming nations such as India and U.S. to increase production to tackle surging gasoline and electricity prices and ease inflationary pressure.
Energy crunch will benefit oil prices:
Crude oil would also be an indirect beneficiary if the situation with the global energy and electricity crisis continues to worsen around the world during the coming winter heating season.
Natural gas and coal prices have skyrocketed this year amid strong heating demand, following a long and cold winter, a solid cooling demand after a warmer-than-normal summer that drained global energy stockpiles, coupled with the tighter-than-expected gas supplies from Russia.
Considering the above factors, we believe that surging gas and coal prices, together with the larger-than-expected energy shortages in Europe and East Asia, will force many utilities in those regions to switch to cheaper fossil fuels as an alternative for power generation such as crude oil, further stressing the already tight oil supply situation.
Bullish oil demand growth:
We believe that the global crude oil demand will continue growing into the year-end, as the positive vaccination programs around the world (with 40% of the global population at least partially protected), in our opinion, allow economies to recover faster-than-expected from the pandemic-led financial recession.
The Covid-19 pandemic, and especially the “Delta” variant has started subsiding in some major energy-thirsty economies such as China, India, Japan, U.S., and the Eurozone, allowing the resumption of global trade and travelling, which would improve the demand outlook for petroleum products such as gasoline, diesel, jet fuel, and petrochemicals.
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