Banks stand firm on oil ‘supercycle’ calls even as prices fall

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Banks stand firm on oil 'supercycle' calls even as prices fall


Banks calling for an oil “supercycle” have said the 15% drop in the price of crude in recent weeks marks a pause rather than the end of what they see as a sustained rise.

International benchmark Brent crude fell from a 14-month high above $ 71 a barrel on March 8 to a low of $ 60.50 on Tuesday, when prices fell 6%. Prices had risen 84 percent between November and the recent high.

Traders were betting demand would rebound sharply with the rollout of Covid-19 vaccines around the world, but delays in vaccinations and tighter lockdowns in Europe have affected near-term oil consumption, as growing concerns over inflation disrupted the financial markets at large. New hedge fund bets on rising oil prices have slowed sharply in recent weeks, according to stock and regulatory data.

But banks such as JPMorgan, Goldman Sachs and Barclays have in recent days either reiterated their long-term oil case or even raised their price forecasts.

Barclays analysts said on Tuesday they were increasing their Brent forecast to $ 66 per barrel on average in 2021 and to $ 71 per barrel in 2022, arguing that they still see demand rebound in the second half of this year.

Christyan Malek of JPMorgan, who was an early proponent of the theory that the oil industry is heading into a new supercycle – or an extended period where demand begins to exceed supply – said that if the ” correction ”in the price would not be welcomed by the industry, it would ultimately strengthen the rally in the longer term.

“At the oil market level, this is the kind of drug the industry needs because it keeps large producers cautious and slows down investment even further,” said Malek, who earlier in 2021 argued that there was a risk that oil would rise above $ 100 a barrel in the coming years. The bank estimates that Brent could average $ 74 a barrel in 2022.

“Overall, this correction could end up being quite constructive for the price as it holds the brakes on capital, which is what you need for a supercycle to thrive,” Malek said.

At the end of last week, Goldman Sachs analysts said they saw the price decline as a “buying opportunity,” maintaining their forecast for Brent at $ 80 a barrel over the next several months.

The rally earlier this year was fueled, in part, by fears that the coronavirus crisis in 2020 has dampened investment in future supplies and permanently slowed growth in the U.S. shale industry.

This has given more power to large producers such as Opec and Russia, who have restricted production until demand recovers when the pandemic is brought under control. Some analysts see demand starting to exceed supply in the coming years, even as Opec members restore production as Western oil majors turn to renewable energy sources.

Rystad Energy, a consultancy firm, said the oil market had become complacent about the threat the pandemic still posed, with stricter lockdown measures introduced in Germany, France and other European countries likely to harm consumption by motorists.

“Road fuels have been the market segment that has taken the recovery in oil demand by the hand, pushing overall demand for liquids up after the drop last year,” said Bjornar Tonhaugen of Rystad.

The so-called Opec + group, including non-members such as Russia, is expected to proceed with caution given the recent price drop when it meets next week. Saudi Arabia could potentially further delay the return of 1 million barrels per day in additional production that the kingdom has slashed beyond its target.

“We believe the kingdom may not fully reverse the unilateral cut this year,” Barclays analyst Amarpreet Singh said.

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