New Bloomberg report weighs in on US$100/bbl oil debate

BI says that expected post-virus demand growth added to spending cuts and underinvestment during 2020's downturn is driving calls for a higher oil price and a supercycle that BI deems misplaced.

Calls for Brent to hit US$100/bbl – a level last seen in 2014 – look overoptimistic to BI in the contact of OPEC's vast 9.2 million bpd of spare capacity and the potential reemergence of more US supply if the oil price edges higher. Post-pandemic fiscal stimulus – combined with a potential drop in supply due to oil companies' underinvestment -– are pushing up some forecasts and prompting calls for an oil supercycle. A significant shortage of supply, due to lower spending and a rapid recovery in crude demand, could create a midterm supply-demand disconnect. However, largely unutilised capacity suggests a near-term price hike to US$100/bbl is remote, according to the report.

BI added that some signs of a recovery in demand and continued OPEC+ output cuts have driven up Brent to US$63/bbl – a 30% increase since December – though BI believes a much more significant and quick demand boost would be needed to create a supply gap sufficient to push the price close to US$100. Wide global vaccine rollouts and a revival of long-haul travel is essential to boosting oil demand closer to its pre-pandemic level – which appears unlikely this year. Jet-fuel demand could still be more than 50% lower in Q1, BI analysis shows, having accounted for almost 8% of global oil demand prior to the pandemic.

According to BI analyst Salih Yilmaz “Non-OPEC output – which could come back online if the oil price stay high for a long period of time – combined with OPEC's near-record spare capacity, may keep the crude price in check. As last year's global output adjusted to the new reality of a relatively low oil price, some higher-cost non-OPEC production came offline – mainly US shale, Canadian oil sands and the North Sea – which could re-emerge if crude keeps rising. If the US rejoins the nuclear agreement negotiated by the Obama administration, we calculate Iran's output could increase by almost 1.5 million bpd, adding to the abundance of available global supply.”

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