Oil on the boil

14 January 2021 • 5 mins read

  • Oil price outlook upgraded: raising 12-monthBrent target to USD62/bbl (old: USD56/bbl)
  • OPEC+ supply discipline and stronger US commodity demand can extend oil prices higher
  • Important to track vaccination speed, which could reinforce or challenge our positive stance on oil

We are revising up forecasts for oil prices. Oil markets have moved faster than expected to the 12-month targets published in our 2021 oil outlook on the back of the OPEC oil cut and as the Democratic win in the Georgia runoffs improves prospects of higher US infrastructure spending. These two developments suggest that the reflationary theme can gain momentum, supporting more Brent price upside to USD62/bbl in a year’s time. 

OPEC+ discipline and stronger US commodity demand can extend oil prices higher

Source: Bloomberg, Bank of Singapore 

Better-than-expected supply discipline from OPEC and signs of near-term OPEC+ group cohesion should keep the oil market tight in the face of demand drag from the winter virus resurgence.

The market had been expecting the OPEC+ to approve another 500kb/d increase in output amid the ongoing stimulus measures and the rapid rollout of coronavirus vaccines. But Saudi Arabia flexed its muscle, announcing that the kingdom would voluntarily cut production by 1mb/d in both February and March while Russia and Kazakhstan lifted output by a combined 75kb/d.

Such a significant Saudi sacrifice of market share is not sustainable throughout the year. But, for now, it is enough to reinforce optimism that OPEC+ will likely continue to restrain oil supply until ongoing vaccine distribution become widespread enough to normalise oil demand. 

Our working assumption is the winter surge of Covid-19 cases globally will subside by spring. This should allow Saudi Arabia to resume production hikes in April to cap a material increase in long-term oil prices to avoid enticing more US shale back into the market.

Increased fiscal spending under a unified government made possible by the Democrats’ win in Georgia’s twin Senate races is also a boon for the oil price outlook.

Global commodity demand should improve as the stronger US recovery allows commodity demand outside of China to play catch-up to steady demand from China. Better prospects of US infrastructure spending later this year are expected to be supportive of oil prices. 

Vaccination speed could reinforce or challenge our positive stance on oil

Source: Our World in Data as of 11 January 2021, Bank of Singapore 

Our positive stance on oil hinges on the assumption that coronavirus vaccines will be effective and become broadly available during this year. It remains important to track the distribution of vaccines and their efficacy in tempering winter waves.

The risks are two-sided. On the downside, if our assumption turns out incorrect, oil demand will probably not recover as currently anticipated. However, on the upside, vaccination speed could pick up globally.

At the moment, Israel is leading the global vaccination race on a per capita basis, vaccinating 21% of the population. Mass vaccination prospects are not derailed by slow initial rollouts in the US and EU, but there is a need to address distribution challenges and supply shortfalls.

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Sim Moh Siong
Commodity Strategist
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