Hot summer in store for oil prices
From early May to early June, the price of a barrel of Brent oil remained quite tame, hovering below USD70. But since then it has resumed its upward trend on the back of the post-pandemic recovery. It is now flirting with the USD76 per barrel mark, while other commodities have peaked. Industrial metals and agriculture products seem to have reached their high points in early May and lumber in mid-May, suggesting that the worst of the supply bottlenecks for these commodities is behind us. Moreover, the divergence is widening between the oil price and other indicators that have been historically closely related to it.
Commodities tend to underperform when interest rates are rising and the US dollar is strong. Yet at present oil prices are increasing even though the dollar has been appreciating and the Fed is showing signs of turning more hawkish. Oil appears increasingly at odds with fundamentals.
Two factors can explain the recent behaviour of oil prices. First, the election of the hardline candidate, Ebrahim Raisi, in the Iranian presidential elections has postponed the prospect that Iranian oil will come back into the market any time soon. Second, the OPEC+ meeting at the start of June created a lot of uncertainty by providing no indication of an increase in oil output after July. Should there be no additional oil from OPEC+, there could be a supply shortfall in H2.
OPEC+ will gather again on 1 July. Without a strong commitment to tracking the 3 million barrels per day (mbd) of additional oil demand expected for H2, oil prices are likely to test USD85. But with the global economy set to reach cruising speed and oil supply becoming abundant, 2022 will be another story. Non-OPEC+ supply is likely to be stimulated by higher prices, while OPEC+ itself will be tempted to increase output in order not to lose too much market share.
All in all, oil prices could rise over the summer. Brent could test USD85 in Q3 2021 before cooling down to USD72 by the end of the year (revised from our previous forecast of USD69) and USD65 at end 2022.