What is the Short-term Crude Oil Price Energy Outlook?

Brent crude oil prices averaged $73/b in June 2021, up $5/b from May (as at 11 August 2021, Brent was at $70.60/b). June was the first month when Brent crude oil prices averaged more than $70/b since May 2019. The increase likely reflected market expectations of continuing near-term tightness in the global oil markets. This was evident in ongoing declines in global oil inventories. As vaccination rollouts have continued to ramp up in parts of the world, personal travel and mobility have been rising during much of 2021. Increasing oil consumption combined with production restraint from OPEC+ and relatively flat crude oil output in the United States have kept global oil consumption above global oil supply, draining inventories. Although global oil inventories during May and June fell at a slower rate than earlier in the year, the inventory draws of 1.2 million b/d over the past two months indicate the oil market was still in a structural deficit. Crude oil prices received additional support from increasing global economic activity and decreasing global Covid-19 cases. These factors have also contributed to rising prices across a wide range of assets including equities and other commodities.

The (US) Energy Information Administration (EIA) expect the recent increases in crude oil prices along the OPEC+ decision to raise production will help meet the expected increase in global oil demand. Despite strength in oil prices during 1H21, EIA expects moderate downward oil price pressures to emerge beginning in 2H21. Why? Global oil production is expected to rise and cause inventories to draw at a slower pace. Global oil inventories will fall by 0.2 million b/d in 2H21, compared with an average draw of 1.7 million b/d in 1H21. Brent spot prices are forecasted (by EIA) to average $71/b during 4Q21 compared with the average of $73/b in June.

Although oil markets are expected to be fairly balanced in 2022, global oil production will outpace global oil demand in 2022. This may put moderate downward pressure on oil prices. In addition, more barrels from OPEC+ members are expected to reach the market. US crude oil production will increase by 0.8 million b/d in 2022 and OPEC crude oil production to increase by 1.8 million b/d in 2022. With deceleration in global oil demand growth to 3.7 million b/d in 2022 and rising oil production, Brent crude oil spot prices will average $67/b next, as forecasted by EIA.

This has implications for oil-producing countries like Malaysia – government coffers (from petroleum royalties) could be lower and the ringgit may not strengthen in 2022 as some may expect. It is also not terrific news for companies in the oil sector. Caution is the word, as many countries come out of lockdowns and recover slowly from this pandemic. The year 2022 is a time for consolidation and reflection. It’s in 2023 that we may recover to pre-pandemic levels. Meanwhile, we should remain vigilant and agile to changes.

Reference:

Short-term energy outlook, U.S. Energy Information Administration, July 7, 2021