The Brent price rose to $66/bbl on February 23, but was unable to hold at that level and closed at $64.09. Over the first two days of this trading week, Brent gained 3.5%. Does this mean that the year-long crisis in the oil market is over, and the Brent price will return for a long time to the comfortable range for producers and consumers of $60-70/bbl?
In our view, there are currently some strong prerequisites for Brent to remain within the above-mentioned range for an extended period. Firstly, a number of countries have secured vaccines against the coronavirus pandemic as the inoculation of the global population gets under way. To remind, the pivotal reason for the collapse of oil prices in early March 2020 and the subsequent economic downturn was the outbreak of the coronavirus pandemic.
Secondly, OPEC+ has been effectively regulating prices through quotas for the reduction of oil output, with over 100% compliance every month to date. Thirdly, the new US President Joe Biden overturned the decision of his predecessor, Donald Trump, to build the Keystone XL pipeline and banned oil companies from drilling on federal lands, thereby capping growth of the country’s oil production. On top of this, there has been an abnormally cold winter in the main oil-producing states, primarily Texas, which was forced to halt production at a number of fields, while increasing the demand for imported oil.
That said, we believe it is too soon to talk about a full-blown turnaround of the global economy after the pandemic. In line with IEA forecasts, oil demand will recover to pre-crisis levels only by the end of 2021 or the beginning of 2022. Notably, demand will increase at the expense of Asian countries that have not yet fully recovered from the effects of the downturn. Rumors about a possible shortage of oil periodically whip the market into a frenzy, but they are not underpinned by fundamentals.
Therefore, the most likely scenario for 2021 is that the Brent price will be range-bound at $50-65/bbl rather than trading steadily in the range of $60-$70/bbl. Overall, we see a greater likelihood that the Brent price will return to 2019 levels in 2022.