Oil's Recovery Set to Drag On Beyond Next Year--Update
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
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
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
"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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