Brent oil could reach $ 70 or up to $ 80 a barrel by the end of this year, said a hedge fund manager. It could reach $ 100 next year, an energy analyst predicts. Oil is falling and, suddenly, everyone is optimistic. But this is probably the most fragile oil price recovery in history. Something as tiny as a virus can kill you.
Herd immunity is a big factor for hedge funds, according to a recent report from Reuters. According to them and several banks, the United States – the largest consumer of oil in the world – will achieve collective immunity by the middle of the year, which will coincide with the summer season for the benefit of oil producers.
“Until the summer, the vaccine should be widely available and just in time for summer travel and I think things are going to go crazy,” a hedge fund manager, David D. Tawil of Maglan Capital told Reuters. .
The government’s stimulus will also help. In fact, it can even push prices to $ 100 or more, according to Amrita Sen.
“We always asked for $ 80 more oil in 2022. Maybe it’s $ 100 now, given the amount of liquidity in the system. I wouldn’t rule that out, ”Sen told Bloomberg this week.
Central banks and governments have been more than generous with the stimulus to address the effects of the pandemic crisis, and while some are skeptical about the long-term benefits of some measures, the general feeling about them is positive.
However, there are some flies in the stimulus ointment. In Europe, some analysts warn that government support for companies is creating so-called zombie companies that will collapse the moment the stimulus ends, which will eventually happen. In the United States, some analysts questioned the need for President Biden’s $ 1.9 trillion stimulus program, saying the economy is already recovering, albeit slowly, and a stimulus package as big as this could lead to inflation excessive, which could have unexpected consequences.
And then there are oil producers, many of whom have been struggling to stay afloat since the pandemic hit the global stage. As oil prices rise, the fight will end, but it will also tempt many to start producing more, especially as demand recovers thanks to mass vaccinations.
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This is the dominant expectation: by the summer, there will be enough people vaccinated for life to start to return to normal, including the demand for oil. Analysts and financiers note that oil companies are much more cautious about production growth this time and will postpone the return to growth mode for longer. This may or may not be the case, but what most analysts and financiers seem to be dismissing is the possibility of a resurgence of Covid-19 infections.
It is not a thought that many would readily consider, not after months of travel blocks and restrictions that have decimated air travel and the demand for oil. Even so, top medical experts, like the director of the US Centers for Disease Control, are warning that the new variants of the coronavirus that caused the pandemic may indeed lead to new spikes in infections. These variants appear to be spreading faster than the original virus, doctors said, but the biggest problem is that the vaccines we have available may not be effective against them.
“They are more virulent, they can cause more deaths and some of them may even escape the immune response, whether natural or from the vaccine,” said Dr. Celine Gounder, a member of the Covid Transitional Advisory Council in Biden-Harris last week.
That is all that would be needed for bullish oil price forecasts to break and burn: another resurgence of cases and news that available vaccines do not work against new variants of the virus. It may well be this risk that is making producers so concerned about the return to production growth. This caution, coupled with continued OPEC + cuts, would likely limit the potential for oil to drop for a time, even if new cases of Covid-19 start to rise again in any of the biggest oil markets. Related: Oil prices record the longest winning streak in two years
Interestingly, the hedge funds interviewed by Reuters do not seem to take into account the move to renewable energy, which is expected to permanently reduce demand for oil. On the contrary, despite many government green transition plans, financiers hope for a bright future for oil, not just this year and next.
“Oil companies, for the first time in a long time, are likely to make a big return,” Jean-Louis Le Mee, head of the hedge fund Westback Capital Management, told Reuters. “We have all the ingredients for an extraordinary bull market in the coming years.”
It is an interesting situation: governments and environmental groups are pushing for less oil and more renewable energy as quickly as possible, publicizing the declining costs of solar and wind energy and advances in storage. Oil traders, on the other hand, expect a recovery in demand strong enough to push prices back to where they were before the pandemic and before the announcement of all these energy transition plans. It would be fascinating to watch who ends up getting it right.
By Irina Slav for Oilprice.com
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