Oil Price Forecasts are increasing - March 5

[dan_s]

As I have been telling you for months in my podcasts, the primary driver of oil prices is the OECD above ground inventories. They are on steep decline, even more than I expected. When they go below 30 days of supply, with no significant signs of increased non-OPEC+ production, the Cartel+Russia will be in control of global oil prices. The U.S. needs to be VERY CAREFUL with how they deal with Saudi Arabia and Iran.

Martijn Rats, CFA – Morgan Stanley top oil market analyst
March 4, 2021 10:22 PM GMT

For the third consecutive meeting, OPEC+ has signalled a cautious approach to unwinding its cuts. Its decision to roll over existing quota was unexpected and keeps the market tighter-for-longer. With inventories drawing already and demand data improving, the bias to prices remains firmly upwards.

A slower-than-expected unwind: OPEC+ was widely expected to start unwinding its production cuts, with estimates for a production increase in April ranging between 0.7 - 1.6 mb/d. Yet, the producers' group decided otherwise. There are exemptions for Russia and Kazakhstan, but production quotas for the rest of OPEC+ have remained unchanged. Also unexpected, Saudi Arabia continues its additional voluntary cuts of 1 mb/d for another month.

OPEC's decision tightens an already tight market: During the first two months of 2021, observable inventories have drawn at ~1.7 mb/d, suggesting an undersupplied market already. On top of that, the demand recovery appears to be gaining momentum: vaccinations are rising sharply, new covid-19 cases are falling globally, mobility statistics from Apple, Waze, Tomtom and Google are improving, even commercial aviation is showing signs of a pick-up, and refinery runs appear to be increasing. We now see the market under-supplied by 1.4-1.9 mb/d during 2Q/3Q:
By the end of the year, we expect oil demand to recover to ~99 mb/d, implying a ~4 mb/d increase from current levels. Yet, for the third consecutive meeting, OPEC has signalled a very cautious approach to unwinding its production cuts. We once again lower our forecast for OPEC production, leading to a market that remains substantially undersupplied this year. On our new forecast, OECD inventories will fall to their 5-year average by 3Q, sooner that our previous forecast of 4Q21.

We reiterate our $70/bbl forecast for 3Q, with an $80/bbl bull case: As economies open up and mobility restrictions come to an end, there is potential for oil demand to grow well over 1 mb/d month-on-month for several months in a row over the summer period. If OPEC stays on such a cautious course, prices could increase substantially further. We leave our base case forecast for Brent to average $70/bbl in 3Q unchanged, but during short periods, our $80/bbl bull case could come into play.

That said, some factors are starting to exert some gravitational pull down: Our outlook remains constructive, and especially over brief periods, prices can still rally sharply. That said, its also worth pointing at a few factors that constrain prices over the medium term. 12-month forward WTI is now trading $15-20/bbl above average shale break-evens, close to the highs set in 2011 and 2018. This presents a real test of capital discipline in the US shale sector. On top, the calendar spread between the 1st and 12th month Brent contract is in its 99th percentile already,
relative to data from the last 15 years. Current time spreads are justified relative to inventories, but only if one assumes demand will largely normalise.