Oil markets have returned to relatively stable ground with Brent prices within a narrow $40-$45/bbl range and could conclusively pass the $50/bbl mark in the second half of 2021, according to Roger Diwan, Vice President Financial Services, IHS Markit, and the IHS Markit Energy Advisory Service.
The IHS Markit Brent price outlook has been revised upward to an average price of $42.35/bbl in 2020 and $49.25/bbl in 2021—up $7.09/bbl and $5.25/bbl, respectively, from the outlook in May.
Exhausted from the worst of the COVID-19 outbreak, oil markets are now at a delicate pivot point as they transition to phase II of the IHS Markit Three Phases of Oil Markets Recovery.
“The record cuts set in motion in May and June by Saudi Arabia and its OPEC+ partners played a pivotal role in accelerating the improbable rebalancing of global oil markets,” Mr Diwan said. “With demand recovering from April lows and after giving markets an extra month to find their footing, these exporters have now moved from managing the immediate surplus of the crisis towards managing the recovery.”
Phase II of the recovery (the “just-in-time oil market” phase) is a delicate transition phase in which surplus inventories are worked down in parallel with rising supply as spare supply capacity returns from Vienna Alliance and North American producers.
OPEC+ and the US are bringing back over 4 million bbl/day of production in July and August. Meanwhile, the global demand recovery is showing clear signs of plateauing and Chinese crude buying has begun to soften.
Barring a large second wave of COVID-19 cases driving widespread economic shutdowns, IHS Markit expects Brent will stay within a $40-$47/bbl price band on average over the next four quarters.
This stabilization period will make way for the more structural stage of the recovery process, wherein the progressive normalization of demand and OECD commercial stocks allows a return of most spare capacity in Russia and in the key producing countries in the Gulf. This could start as early as the second half of 2021, when Brent prices could conclusively pass the $50/bbl mark.
“The recent display of restored harmony among OPEC+ heavyweights Saudi Arabia and Russia illustrates that the strategic debate within the group over price levels and market share has time to run,” Mr Diwan said. “As long as prices hold in the current range, demand concerns will likely help keep the agreement on course. When prices surpass $50/bbl, potentially lifting capital spending in the United States higher, that is when changes to the tenor of the discussion, and the divergence of interest could start to play out.”