While demand is expected to increase as well next year, additional OPEC+ and US production should result in a balanced oil market. (ddp)

Brent crude has reached its highest level since October 2018, while WTI has marked a fresh 7-year high. Although some investors took profit on Thursday, we continue to see markets as well-supported given consumers increasingly switch to fuel oil from coal and gas. We previously thought that record high oil prices might prompt OPEC and its allies (OPEC+) to agree to increase production by more than 400,0000 barrels per day (bpd) in December at their next ministerial meeting on 4 November.

But comments from Saudi, Russian, and UAE officials suggest that the group has no plans to increase production at a faster pace, and we advise investors to focus on the following:

OPEC+ remains cautious amid lingering uncertainty what rising new coronavirus infections mean for the recovery. We now expect the group to pursue a more prudent approach and increase supply by only 400,000bpd in December, considering the uncertainty on how the pandemic may impact oil demand during the Northern Hemisphere winter and given that all energy agencies forecast an oversupplied oil market next year.

High natural gas prices in Asia and Europe support switching from natural gas to crude/fuel oil in the power sector. With more countries opening up to vaccinated tourists from November, jet fuel is likely to benefit as well. Hence, we think oil demand will hit 100mbpd in December. Modest supply growth amid recovering demand means that oil inventories are likely to continue to decline over the coming weeks and keep oil prices supported.

While demand is expected to increase as well next year, additional OPEC+ and US production should result in a balanced oil market. With more OPEC+ members struggling to increase production in line with the group’s plans, its additions in 2022 will likely be only a fraction of the currently intended 3.76mbpd increase, which should prevent an oversupplied market, in our view.

So bearing all of this in mind, we now expect Brent to trade at USD 90/bbl in December and March, before leveling off to USD 85/bbl for the rest of 2022 (previously USD 80/bbl for all tenors). For investors there are various ways how to benefit from the current supply-demand dynamics in the oil market. For instance, our analysis suggests that energy stocks are only pricing in a Brent crude price of USD 55–60/bbl.

Upside scenario

Brent crude oil June 2022 target: USD 90–110/bbl
Upside risks to our forecasts come from several factors. Destabilizing political events in oil-producing regions such as Libya, Venezuela, Nigeria, and the Middle East could trigger a sharp drop in supply for a sustained period. A faster-than-expected oil demand recovery as mobility picks up and a slow production response (i.e., increase) from the US and OPEC+ would also be supportive.

Downside scenario

Brent crude oil June 2022 target: USD 50–70/bbl
Downside risks include a continued increase in COVID-19 infections that results in extended mobility restrictions and weighs on the oil demand recovery. A hard landing of the Chinese economy in 2022 also poses a downside risk, as emerging Asia has been the engine of oil demand growth in recent years. Another concern is a breakup of the OPEC+ alliance that results in a renewed price war between Saudi Arabia and Russia, with the two countries pumping oil at maximum capacity, or the alliance bringing back production too quickly. The return of disrupted oil production in Venezuela and Iran could also weigh on prices.

Main contributors: Giovanni Staunovo, Dominic Schnider, Wayne Gordon

Content is a product of the Chief Investment Office (CIO).

Original report - Crude oil: Oil market to stay tight, 21 October, 2021.