Supply Constraints may Drive Oil to $100

Factors such as tepid OPEC+ production hikes, gas-to-oil substitution, China’s power crunch and the inability of producers outside OPEC+ to meet surging demand could well spur oil prices towards $100 per barrel (/b), a report said.

Markets have pivoted from pricing demand recovery to now pricing supply scarcity, said the Mitsubishi UFJ Financial Group (MUFG), a leading global financial services group, in its latest Oil Market Weekly.

“Current spot oil prices are hovering close to our own above consensus bullish forecast of Brent ending 2021 at $85/b,” said MUFG in the report.

“Central to our constructive oil conviction that we have catalogued over recent weeks is not that the market is cyclically tight but critically structurally underinvested as energy transition and ESG considerations after oil’s golden era between 2010-14 has capped capital expenditures with inadequate production capacity to meet today’s vaccine-led demand recovery.”

However, with pandemic inventory buffers exhausted, MUFG’s modelling estimates signal that oil prices between $100-110/b will be negated by demand elastic destruction as the balancing market mechanism of last resort, i.e. the cure for high prices is high prices – a self-correcting process.

Oil prices have taken some respite thus far this week despite prevailing tight fundamentals as prospects of a resumption in Iranian nuclear talks, Chinese steps to stabilise the power sector and higher US crude stockpiles weighed on the front end of the curve. We are tactically bullish for the week ahead, with markets squarely focused not only on pricing demand recovery but increasingly pricing supply scarcity.

MUFG’s modelling estimates signal that the prevailing market deficit which started in June 2020, will not pivot into oversupply until the second quarter (Q2) of 2022. Given the tight oil market, we forecast Brent ending Q4 2021 and Q1 2022 at $85/b and $82/b, respectively – widening the strong backwardation embedded into the futures curves and generating positive carry for oil investors.

“Thereafter, as the market is expected to return to a mild surplus, this leads us to be tactically bearish with a leg lower to $74/b, $72/b, and $66/b in Q2, Q3 and Q4 2022, respectively,” MUFG concluded in the report.

About Parvin Faghfouri Azar

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