WE have again made the right call in 2021 in the oil market. As the year commenced, we at Juwai IQI shared with our valued clientele, through our newsletter, that according to our global market intelligence reconnaissance, oil prices will meander around US$50 to US$70 a barrel and that the forward price curve is very strong in the market.
Oil prices are up 29% trading at US$66.17 a barrel as of Feb 23, 2021. Many investors are now asking me that if higher oil prices are upon us. It looks very likely, but the March 4 Opec meeting is important for the oil market as it provides forward guidance to the investors. Goldman Sachs, UBS and Juwai IQI are bullish on the energy market which is based on a solid premise. The macro landscape for the energy market at the moment is pretty strong and oil prices are heading in the northern territory.
I have been quite buoyant since November 2020, as I have been sharing in the market with press and media that the most bullish signals are:
1. The geopolitical risk is growing bigger than ever with tight supplies.
2. A depreciating dollar would support the higher price call in the near future.
Many oil pundits working in North America were predicting oil prices at US$10-20/barrel since last year and bragging about shale gas revolution. Pretty delusional. Many shale gas companies in the US are bankrupt with zero cash flows and zilch capex structure.
According to the latest update from Goldman Sachs: “Brent prices will reach US$70/bbl in 2Q21 and US$75/bbl in 3Q (US$10 above the prior forecasts). We expect this rally to be driven by both rising long-dated prices as well as a sustained steep level of backwardation. This leads us to recommend investors go long either (1) a front-month rolling index to capture a cross-asset high 10% level of annualised carry, or (2) the Dec-21 Brent future position that we first recommended last August. We in turn recommend consumers restart hedging forward price exposure while producers wait to add to hedges.”
Strategic market insights
According to the latest report from Baker Hughes’ rig count showed that as of Jan 31, 2021, there were just 295 rigs in the US drilling for crude oil — more than 400 fewer rigs than were active a year ago. Global capital expenditure is down by US$100-US$300 billion, supply constraints and increasing demand, all are heading in one direction, that is, spot prices are higher than future prices. Backwardation is back in the energy market.
Energy demand remains strong and is back in the market.
Oil is set for a strong bounce- back in 2021. It’s only a matter of time until global demand climbs back over 100 million barrels per day by first quarter 2022 or second quarter 2022 as the supply/demand equation is getting tight in the energy market calculus.
This article was contributed by Juwai IQI global chief economist Shan Saeed (pix).