Where oil prices could be heading later this year?
An overview of where the oil market is headed towards in 2021
Oil prices have been among the interest of most investors this year, not just for investment opportunities, but as a benchmark to track the economic recovery. It has been more than a year with the pandemic, and since the second quarter of 2020, focus was on the economic recovery. Politicians, Central Bankers, and almost everyone tried to forecast when the virus spread could end, and the global economy recovers. There has been high uncertainty with newly discovered variants making it almost impossible to predict what's next. The vaccination roll-out was the light at the end of the tunnel, but yet there is more about this.
Where do you think oil prices will head in the future?
Just a quick look back for newcomers, as covid19 disrupted the economic activity, oil demand dropped significantly, but it took some time for oil producers to notice the risks and put their market-share conflicts aside. They continued to pump oil; inventories soared as the restriction measures reduced demand. Tankers and storages were full, and buyers had no place to store oil, where paying a premium for you to buy their oil, a cheaper alternative. Thus, oil prices fell to $-37. Yes, you were getting paid to buy oil. President Donald Trump putting an end to the clash between Russia and Saudi Arabia. OPEC and other top producers, aka OPEC+ decided to cut oil output to match the falling demand. The organization had a strategic plan, they go aggressive on cuts at the beginning, and unwind as the economic activity rebounds. Their actions worked extremely well, but they had to improvise, especially as the second wave of the virus kicked in, derailing their initial plan.
After the storytelling, let's move
forward by dissecting the matters that would drive oil prices in the coming
period, go over top banks prediction, and analyze the chart.
The Rising United States Oil Production
With the help of shale discoveries, the United States was able to steal the podium positions from Russia and Saudi Arabia, and become the top oil producer in the world, even a petroleum exporter for first time since 1949. As oil prices recovered during the past 12 months, US shale oil producers are coming back to work, fighting for a portion of the cake, aiming to recover from last year's losses, incurred as prices fell below cost. Currently, as per the US EIA, the production is stalling near 11 million barrels per day. However, if we take a quick look at seasonals, we can notice that during the past 10 years, the US production activity picked up towards year-end. The charts below show the US production since 2015, and how production progressed on average since 2011, versus this year's path.
The United States oil production
The United States production this year, relative to the past 10 years.
Biden's Administration and the Nuclear Deal
The nuclear deal between the World's superpowers and Iran has been an interest for energy market participants. In May 2018, the prior US President Donald Trump abandoned the Obama's deal, and implemented sanctions on the regime. The move pushed the tensions between the two countries to historic heights. As Biden came to the presidency, he seemed more open to negotiating with Iranians. The recent negotiations were described as very constructive by both ends. The prospects of restoring the same deal are low, but as long as the parties are in talks, they can agree on a different scheme, which would come back to oil markets with additional supply from Iran. The chart below shows how the Iranian oil production was affected in the past 10 years.
Iran Oil Production
OPEC+ Long-term disputes
Early in 2020, conflicts aroused between OPEC+ components, especially Russia and Saudi Arabia, which account for the biggest production share. Price-war fears weighed on market, and with lower demand due to lockdowns, oil prices plunged sharply with WTI ending in negative territory. As oil producers realized the need to put disputes aside till the oil market stabilizes, they agreed on a certain quota. Lately, we have witnessed different views on production, some members wanted to pump more oil, and others preferred to continue supporting the fragile market. Saudi Arabia voluntarily announced cutting production, allowing Russia and Kazakhstan only to raise production a little, taking into consideration seasonal factors. Covid19 forced governments to implement exceptional spending measures, raising their deficits. Oil producers are seeking higher earnings from their selling to cover up. In the long run, producers will clash, as the recovery from COVID19 is uneven around the world. Some producers are more fortunate than others, making it hard to stick to a certain quota to match everyone. OPEC+ meetings will become more challenging going forward, and a failure in keeping a proper production plan will weigh on prices again.
OPEC Production Patterns 2016 till date.
Russia Oil Production Patterns 2016 till date.
Green Energy Era
The covid19 outbreak urged policymakers to take more steps to protect the environment. Reducing carbon emissions is one, and this came more into the spotlight with Biden supporting green energy, and fighting the traditional energy sources. The latter is proposing a massive infrastructure plan that promotes clean energy sources. A clear example of where the world is going in terms of energy can be seen with the latest rush to electric cars. The World's top carmakers were challenged by Tesla to design an alternative better for the environment. Many carmakers are shifting to electric cars, this will be followed by electric boats, and electric planes, affecting negatively oil demand levels on the long run. Moreover, the technology behind green energy sources is progressing by the day. These alternatives are becoming cheaper and more efficient than traditional ways. China and the United States which account for almost 35% of the world's emissions are moving forward with increasing non-fossil share of primary energy, promoting financing for green energy sources, and much more.
The charts below show how the issuance of Green bonds was emerging in the past years, and growing investors' interest in Renewable and Alternative energy.
Green Bonds Issued in US dollars.
FTSE Environmental Opportunities Renewable and Alternative Energy 50 Index
COVID19 Continuous Spread
Covid19 disrupted the global economic activity, and since then investors were trying to anticipate when the world would be virus-free. This is a million-dollar question, when the virus first invaded the world, market participants were expecting the recovery to take place in six months or a bit more, but the world yet hasn't recovered and the virus is hitting back with different variants. When the vaccines were discovered, we were so optimistic about them, but as we are witnessing by the day, some of them are being avoided, and their rollout is slow and limited to rich countries. Top oil producers raised their forecasts for oil demand, but they aren't close to what they expected at the beginning of the pandemic. On the other hand, the virus created new habits for people and organizations which will delay any restoration of economic activity or at least oil demand to pre-pandemic levels.
Covid19 Daily Cases
United States Energy Information Administration oil supply/demand forecast
Top Banks on Brent
What does the chart say?
Brent Crude. Daily Time Frame. EMA 55 - 200.
The Brent crude has been trending upward in an equidistant channel. After logging, its exact 2020 high of $71.36, the price traded sideways, recording lower highs and higher lows, supported by the 55-day EMA.
Bearish Scenario: Price breaks below the 55-day EMA targeting the 200-day EMA, which could coincide with the bottom of the channel and a previous resistance area that could turn into support, near $57.00.
scenario: Price breaks above the interim high of $68.04, aiming at 2021 high of
$71.60. An extension to the upward move would drive the price to $86.70, the
highest since October 2018.