May 23, 2021: We have long argued oil was capped at $70/bbl in 2021…
The combination of easy monetary and fiscal policy, a roaring Chinese economy, and growing global infrastructure spending plans have all conjured up a turbocharged macro outlook for many raw materials from bulks to metals to agriculture in recent months. In turn, the large upward move in commodity prices has contributed to a big jump in producer price inflation. Big macro drivers-including a weaker USD, inflation and monetary easing-all point to higher oil prices in 2022. Yet Brent crude oil has barely broken $70/bbl a couple of times this year, our target for 2Q21, despite record copper and iron ore prices. The relatively modest recovery in oil is due to two main reasons. First, global oil demand remains at ~95mn b/d for 2Q21 (IEA), or 4% below the seasonal pre-Covid levels of 2019. Second, OPEC+ still holds plenty of spare productive capacity. Both of these factors could soon change.
…but we now see micro headwinds fading, macro roaring
While a Covid-19 surge in India has depressed mobility, the link between Covid-19 cases and fuel consumption is starting to break down around the world. In part, workplace mobility is picking up thanks to the global vaccination campaign. For instance, despite a resurgence in Covid-19 cases in countries like Chile, the UAE, or Bahrain (nations with some of the highest vaccination levels in the world), hospitalization and death rates have stayed low. So mobility has kept improving there. With global transportation demand set to recover sequentially, the upcoming new Iran nuclear deal could be the next bump in the recovery path for oil prices. Even then, we see three mitigating factors: (1) a return of Iran is already embedded into our global oil balances, (2) OPEC+ will likely act to accommodate the comeback one of its largest members, and (3) Iranian output is already nearing 2.4mn b/d anyway, up 0.36mn b/d YoY.
Consumer preference shift is forcing forward oil prices up
What does this all mean for oil prices? In short, macro tailwinds are strong and micro headwinds should start to fade soon, in our view. Moreover, a post-Covid scenario marked by a permanent reduction in mass transit use could quickly translate into a major world-wide oil demand rationing exercise. Even if EV sales reach 34% by 2030, an acceleration in miles driven of 20% could push peak oil demand levels to 109mn b/d by 2027. On the supply side, oil field decline rates have accelerated sharply in 2020 and in early 2021. Plus energy capex has come down sharply in the past year and now the IEA is calling for further investment reductions to meet climate goals. Reflecting a tighter market ahead, Brent in 2026 recently traded above $59/bbl last week, up from a 2020 low of $47/bbl. With spec oil positions relatively low and CO2 prices rising too, we see room for long-dated oil prices to move structurally higher by $5 to $10/bbl.