Oil price reflects optimism more than structural demand

Oil prices have doubled since late October to reach pre-pandemic levels of fifteen months ago, as the global economic outlook improves and markets anticipate more travel, commute and consumption. At this point, they are a better indicator of economic optimism than evidence of a strong recovery in demand.

In April 2020, some crude oil contracts briefly lost value due to the impact of lockdowns on the economy, collapsing demand, and the Saudi-Russian disagreement over reducing the price. production. In the context of the Covid-19 pandemic, the rise in the price of oil seems to indicate that the economies are finally recovering thanks to the improvement in employment and production data. Global immunization programs, coupled with fiscal and monetary stimulus, including the US $ 1.9 trillion program signed last week in the United States, are also supporting the rise in oil prices.

The OECD predicts that the global economy could grow 5.6% in 2021, and a further 4% in 2022, according to its economic outlook released this month. A figure more than a percentage point higher than his December 2020 estimate.
In early March, members of the Organization of the Petroleum Exporting Countries (OPEC) and their OPEC + allies, notably Russia, Mexico and Kazakhstan, surprised the markets by maintaining their production quotas for April, despite the improvement of the economic environment. The price of Brent, which serves as a benchmark for world oil, rose to 70 USD / barrel. As of this writing, a barrel is trading at $ 69.90.

Oil stocks, still close to double their 2009/10 peak, could quickly return to the market. Until some of this excess capacity is absorbed, oil prices are unlikely to return to pre-2014 levels.

In January 2021, Saudi Arabia cut its daily production by one million barrels to some 8 million barrels, a level that will remain until April.

If OPEC recognizes the destabilizing impact of the pandemic on demand, this decision shows that the kingdom is satisfied with the current level of prices. This suggests that Saudi Arabia, the third largest producer in the world after the United States and Russia, does not deem this high level sufficient to trigger an increase in production in the United States, which traditionally follows the rise in prices. .

On March 5, Saudi Energy Minister Prince Abdulaziz bin Salman, said that “the slogan ‘Fore, darling, fore! “Was gone forever”. U.S. producers have indicated that they will not make any significant changes to their production, choosing instead to distribute higher dividends and repay debts they accumulated during the pandemic.

Much of the debt of US oil companies will mature in 2021 and peak in 2022, especially that of the most vulnerable issuers rated in the speculative category. These refinancing needs will lead these companies to adopt a more cautious and disciplined approach to capital spending.

Structural changes and demand forecasts

The post-pandemic recovery is expected to accelerate demand for alternative energy and erode demand for fossil fuels. BP, the world’s seventh-largest oil company by market capitalization in 2020, wrote last year that the decline in fossil fuel use and the rise of renewable technologies are structurally altering energy demand and could put downward pressure on energy. long-term oil prices. The company estimated that demand for oil (and coal) had already peaked, although it should be noted that this view is not universally shared within the oil industry.

Last month, alongside rising oil prices, the sovereign bond market anticipated an economic recovery and rising inflation, a backdrop that translated into higher rates. Historically, oil and metal prices rise with economic expansion and are a component of inflation. For now, the US Federal Reserve seems comfortable with higher rates as long as they reflect rising economic optimism.

However, the current economic outlook does not change the structural evolution of energy consumption, and the recovery in oil demand has still not brought it back to 2019 levels. Prices could be further driven by the constraints in this area. supply only through confidence in a full recovery of long-term economic demand.

How OPEC + adapts to a recovery in demand will be the main lever for oil prices this year. As inventories decrease, OPEC + appears to be in the responsiveness rather than the anticipation of increased demand. This could create an environment for a short-term breach of the $ 70 / bbl level.

Geopolitical risk

Rising oil prices have uneven effects on global economies. The growth patterns of Gulf producing countries and Russia, as well as Latin American exporting countries like Colombia, are dependent on revenues from oil exports. Net importers, such as China, could see their current account deteriorate, while India, which has already asked OPEC to cap price increases, is exposed to a deterioration in its trade balance and a inflationary surge linked to energy costs.

The movements of the oil market are inseparable from the geopolitical context. Before the election of Joe Biden, investors were already speculating on a normalization of relations between Iran and the United States, with a potential lifting of American sanctions allowing Iran to officially restart its oil exports. On February 25, the Biden administration ordered an airstrike in Syria. It targeted facilities on the Iraqi border, used by Iranian-backed militants, which the United States said were responsible for the attacks the previous week. So far, the US administration has indicated that it is in no rush to resume negotiations on the nuclear deal with Iran.

The massive social and economic repercussions of the past year have accelerated the trend away from dependence on fossil fuels. While longer-term geopolitical consequences are difficult to predict, the strategic landscape has already changed for the oil industry, with demand turning to alternative energy sources.

Investors can already choose in favor of companies that offer or are already in the process of transitioning to cleaner solutions. In some cases, it may also be oil companies making investments after recognizing that this strategic shift was well underway.

The stocks, supply and prices of the oil market will balance out according to the economic recovery. The main risk is that heightened tensions within OPEC + make production decisions unpredictable. Indeed, as the market approaches equilibrium during this year, OPEC + producers will be less inclined to reach consensus on production levels. In this context, we expect a price of 60 USD / barrel over a twelve-month horizon and closely monitor the impact of the normalization of oil prices on our portfolios.