As COVID-19 vaccine distribution continues to roll out, global markets underestimated the demand for oil as the economy reopens for business. Goldman Sachs is expecting Brent crude to hit $80 per barrel and forecasters remain optimistic that prices will stay above $70 per barrel by mid-2021.
Last week’s drop in prices is not a sign of what is forecasted to come during the summer months. Brent traded at $66.44 per barrel and West Texas Intermediate (WTI) prices dropped to $63.58 per barrel. The US demand is expected to continue rising as drivers hit the road. With a strong gasoline market, prices recently topped $3 a gallon for the first time since 2014.
The EIA is expecting a national average of 9 million barrels per day (bpd) to be consumed in the US during the summer driving season. This will surpass last summer by 1.2 million bpd.
As more people begin traveling in the US and Europe, this developed market recovery is helping offset recent demand and likely to be a slower recovery in South Asia and Latin America. Jeffrey Currie, head of commodities research at Goldman Sachs said, “Despite the global market deficit coming in line with our forecasts in recent months, we under-estimated the weight of such demand and Iran uncertainties, keeping prices trading below $75 a barrel in the second quarter of 2021 fair value. With growing evidence of demand rebound, and imminent clarification on the likelihood of an Iranian return, we now see clearer path for the next leg higher in oil prices, with the sell-off offering opportunities to position for the rally to $80 a barrel.”
Within the last year, Brent crude has jumped nearly 85 percent to $66 a barrel in a volatile market with much uncertainty over concern with vaccine distribution and COVID cases still spiking in parts of the world.
Iran’s crude is expected to grow from 800,000 bpd to 1.4 million bpd by December, and then to 2 million bpd by July of 2022. The increase in international travel is triggering higher demand for oil. Goldman Sachs states, “With indications of re-opening international travel, we forecast that global demand will increase by 4.6 million barrels per day through year-end, with most of the gains continue to expect only limited contribution from Emerging Markets outside of China, with 75 percent of our demand recovery coming from direct markets and China, jet demand and seasonal cooling in the Middle East.”
On another note, shale production declined by 0.25 bpd with rig activity continuing to fall. US drilling rig count rose during the last 25 weeks; however, the EIA reported crude production at 10.9 million bpd in March and almost 11 million bpd in April. These numbers are still lower than the all-time production of 12.8 million bpd in January.