In a sign that economic recovery is swiftly under way, Bank of Singapore (BOS) currency strategist Sim Moh Siong has announced an upward revision in oil price forecasts. Buoyed by OPEC+ supply discipline and stronger US commodity demand, this bullish prediction ultimately rides on how efficiently the world can roll out Covid-19 vaccines.
“Oil markets have moved faster than expected to the 12-month targets published in our 2021 oil outlook on the back of the OPEC oil cut and as the Democratic win in the Georgia runoffs improves prospects of higher US infrastructure spending,” Sim writes in a Jan 13 broker’s report, with resulting reflation supporting Brent price upside to US$62/barrell ($82.05) in a year’s time.
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Typically beset by bickering over oil production quotas, OPEC+ has exhibited near-term group cohesion as better-than-expected supply discipline from members signal a tight oil market. It was expected to approve another 500kb/d increase in output in the face of ongoing stimulus and vaccine rollout. But Saudi Arabia voluntarily cut production by 1mb/d in February and March while Russia and Kazakhstan lifted output by 75kb/d combined.
“Such a significant Saudi sacrifice of market share is not sustainable throughout the year. But, for now, it is enough to reinforce optimism that OPEC+ will continue to restrain oil supply until ongoing vaccine distribution becomes widespread enough to normalise oil demand,” comments Sim.
Sim’s working assumption is that the present winter surge in Covid-19 will begin to ease by spring. The Saudis will then likely resume production hikes in April in a bid to limit a material increase in long-term oil prices, preventing the attraction of more US shale oil back into the market.
Oil prices will also benefit from increased fiscal spending by a unified Democrat government in the US as Democrats won both senate run-off races in Georgia. Sim sees global commodity demand improving with the stronger US recovery, which he says will allow commodity demand outside of China to catch up with steady demand from China. Oil prices will benefit from better prospects of US infrastructure spending later in 2021 too.
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The good news depends, however, on the assumption that Covid-19 vaccines are effective and are broadly available in 2021. Should this assumption be incorrect, oil prices will not recover as expected. If it were true, however, vaccination speed could increase worldwide.
“At the moment, Israel is leading the global vaccination race on a per capita basis, vaccinating 21% of the population. Mass vaccination prospects are not derailed by slow initial rollouts in the US and EU, but there is a need to address distribution challenges and supply shortfalls,” says Sim.
As of 2.25pm, Brent crude oil prices are trading upwards 1.27% at US$57.30/barrel.