Oil prices to rise further this year on the back of a strong rebound in demand – CE

The price of oil has now risen by over 50% since November 1, 2020. Recent market moves have led strategists at Capital Economics to revise up the end-2021 oil price forecast and expect oil prices to make further gains.

Key quotes

“Given the lacklustre state of current oil demand and risks to vaccination programmes, we think that there is a high risk that oil prices could drop back in the near-term. That said, in light of the recent price performance and the story we are telling, our forecast of $60 per barrel by year-end now looks conservative and we are raising it to $70.”

“We are upbeat on the outlook for demand this year, premised on the view that mass vaccination will enable the opening up of the hospitality and travel sectors in many advanced economies. In particular, we expect a release of pent-up demand in the second half of the year. What’s more, we suspect that oil use will still pick up strongly even if international travel restrictions remain in place, as higher levels of domestic travel offset some of the weakness in jet fuel demand.”

“Supply looks set to remain constrained, at least for a while yet. US production has flatlined in recent months, despite the rally in prices. And while we still expect US output to increase this year, we have revised down our forecast. OPEC+ is also broadly sticking to output quotas and Saudi Arabia is going it alone with chunky voluntary production cuts in February and March.”

“We are retaining our forecast that the price of Brent will fall back to $55 by end-2022, not least because there is considerable oil production capacity that can be brought back online if the price is right. Moreover, we expect oil demand growth to slow sharply next year after this year’s pent-up demand has been sated.”