By David Hodari

Oil prices won't recover to pre-coronavirus levels by the end of next year, investment banks say.

A group of 10 investment banks polled by The Wall Street Journal forecast that futures for Brent crude oil, the global benchmark, will average $53.50 a barrel in 2021's fourth quarter. U.S. benchmark West Texas Intermediate futures will average $50.31 a barrel in the same quarter, they estimated.

While that means those institutions expect both benchmarks to rally $10 a barrel from their average forecasts for 2020's final quarter, they forecast that Brent prices will remain well short of the $60-a-barrel pre-lockdown levels.

Oil prices sharply dropped on Thursday, with Brent crude down 3.2% at $40.93 a barrel and U.S. crude futures 3.7% lower at $38.72 a barrel.

Gentle early losses accelerated after the release of a raft of U.S. economic data that signaled a stalling economic recovery in the U.S., according to Giovanni Staunovo, commodity analyst at UBS Wealth Management. Uncertainty around bipartisan negotiations over a coronavirus relief package was also worrying investors, he added.

Even if the oil market isn't roiled by the same lockdowns that crashed prices earlier in 2020, investment banks forecast that the effects of Covid-19 will linger next year.

Stalling demand for transportation fuels is one of the key factors weighing on broader oil consumption, with gasoline demand flatlining. The International Air Transport Association this week downgraded its 2020 air-traffic estimate to a fall of 66% from 2019 levels, and U.S. airlines implementing substantial job cuts.

The key risk to oil demand "is definitely the danger from the jet-fuel side, which is underestimated by the market," said Eugen Weinberg, head of commodities research at Commerzbank.

Still, some major economies are expected to continue to recover in the first half of 2021, leading to lumpy oil-demand recovery across regions. China's economic recovery has maintained its momentum in recent months, while large parts of Europe have begun to reimpose regional coronavirus restrictions and infection rates in the U.S. remain elevated.

The Federal Reserve's pledge to hold interest rates near zero for an extended period should keep the dollar weak, providing support over the coming year to dollar-denominated commodities such as oil, according to UBS Wealth Management's Mr. Staunovo.

A broad, if uneven, recovery in economic growth and oil demand in the first half of next year will likely lift prices, although that could in turn incentivize producers to ramp up output, said Harry Tchilinguirian, global head of commodity markets strategy at BNP Paribas.

"The thing that concerns banks for 2021 is the perennial question of OPEC cohesion: Will they continue tapering cuts if they see no need to withdraw supply," he said.

The Organization of the Petroleum Exporting Countries and its allies have broadly maintained historic supply cuts agreed upon during the oil-price crash despite the economic pressure felt by oil-producing economies. Still, Saudi energy minister Prince Abdulaziz bin Salman, the cartel's de facto leader, in September called for better compliance.

There is also the prospect of a resurgence in U.S. production. A September survey of oil executives by the Federal Reserve Bank of Dallas found that more than half of the respondents expect the U.S. oil rig count to increase substantially if WTI prices rise to between $51 and $55 a barrel.

Investment banks don't see U.S. prices hitting those levels until 2022, when non-OPEC production could once again leave the global oil market with excess supply.

Write to David Hodari at David.Hodari@dowjones.com

(END) Dow Jones Newswires

October 01, 2020 17:02 ET (21:02 GMT)

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