- A growing number of major investment banks are turning bullish on oil in the medium to long term.
- A lack of investment is leading to supply deficits as demand rebounds to pre-COVID levels.
- Rebounding consumption and tight supply could push oil prices even higher.
Six years after former BP (NYSE:BP) chief executive Bob Dudley said that “the industry needs to prepare for lower for longer,” a growing number of major investment banks now expect “higher for longer” oil prices.
Rebounding global oil consumption amid tight supply—contrary to some forecasts last year that indicate demand may have peaked or was close to its peak—as well as years of underinvestment in new supply following the 2015 crash, have prompted Wall Street banks to raise significantly their projections for oil prices in the short and medium term.
Oil prices have hit multi-year highs in recent days, with WTI Crude at its highest since 2014 and Brent Crude at the highest level since October 2018.
Even after the latest rally, prices still have headroom to rise further, many major investment banks believe.
Goldman Sachs, for example, sees Brent hitting $90 per barrel at the end of this year, up from $80 expected earlier. The key driver of Goldman’s higher forecast is global oil demand recovery amid still a weaker supply response from non-OPEC+ oil producers.
The investment bank also sees sustained higher oil prices in the coming years.
Fundamentals warrant higher oil prices, and the bank’s forecast for the next several years is $85 a barrel, Damien Courvalin, Head of Energy Research & Senior Commodity Strategist at Goldman Sachs, told CNBC earlier this month.
Oil demand will set record highs next year and the year after that, and we need to see a ramp-up in investment, he said.
“We’re facing potential multi-year deficits and the risk of significantly higher prices,” Courvalin told CNBC.
RBC Capital Markets is also bullish on oil prices in the medium term.
“We maintain the view that we have held all year—that the oil market remains in the early days of a multi-year, structurally strong cycle,” RBC analyst Michael Tran said in a note in mid-October carried by Reuters.
Last week, Morgan Stanley raised its long-term oil price outlook up by $10 per barrel to $70. BNP Paribas expects oil prices at nearly $80 a barrel in 2023, Bloomberg notes.
UBS expects oil prices “to remain well supported into next year,” with the market staying tight at least until the first quarter of 2022, due to the lowest inventories in OECD since 2015, only gradual easing of the OPEC+ cuts, and oil demand hitting 100 million barrels per day (bpd) in December 2021.
“While demand is expected to increase as well next year, additional OPEC+ and US production should result in a balanced oil market. With more OPEC+ members struggling to increase production in line with the group’s plans, its additions in 2022 will likely be only a fraction of the currently intended 3.76mbpd increase, which should prevent an oversupplied market, in our view,” Giovanni Staunovo, Dominic Schnider, and Wayne Gordon wrote on Friday.
“So bearing all of this in mind, we now expect Brent to trade at USD 90/bbl in December and March, before leveling off to USD 85/bbl for the rest of 2022,” UBS’s analysts added.
Beyond 2022, oil prices are likely to remain structurally higher as oil demand will continue to rise while new supply would lag consumption growth, primarily due to five years of underinvestment and the pressure on oil majors to cut emissions and investments in new supply, analysts say.
Global annual upstream spending needs to increase by as much as 54 percent to $542 billion if the oil market is to avert the next supply shortage shock, Moody’s said earlier this month.
“Our analysis demonstrates that upstream companies will need to increase their spending considerably for the medium term to fully replace reserves and avoid declines in future production,” Moody’s Vice President Sajjad Alam said.
The oil industry is “massively underinvesting” in supply to meet growing demand, which is set to return to pre-COVID levels as soon as the end of 2021 or early 2022, Greg Hill, president of U.S. oil producer Hess Corp (NYSE:HES), said at the end of September.
Last year, global upstream investment sank to a 15-year low of $350 billion, according to estimates by Wood Mackenzie from earlier this year.