By Alex Kimani of OilPrice.com
There has been a major dichotomy on Wall Street regarding the oil price trajectory, with some viewing the massive oil and gas rally as being temporary and transitory while the bulls have been saying this rally still has legs to run.
Standard Chartered Global Research has been providing regular commodities updates, and made waves in August when they declared that a Brent price of $65/bbl or lower was more likely than $75/bbl or higher. Stanchart said its bearish view was informed by the fact that "...a significant amount of money has already entered the market in the Wall Street-generated belief (mistaken according to our analysis) that the balances are much tighter and justify USD 80-100/bbl."
More recently, Stanchart maintained its bearish tone, saying that the oil price rally is not fully justified, and that the fundamental case for USD 80/bbl is not any stronger today than it was a few months ago.
Well, the energy bull market has continued defying all bearish expectations, and has forced Stanchart to do a 180 and join the bull camp.
In its latest commodity update, coming shortly after the October 4th OPEC+ meeting, Stanchart analysts say:
"We think the market has concluded that OPEC+ does not see USD 80 per barrel (bbl) as a ceiling, and that it is unlikely to cool prices in the short term. These factors lead us to change our price views; we raise our 2021 average Brent price forecast by USD 6/bbl to USD 71/bbl, and our 2022 forecast by USD 8/bbl to USD 67/bbl. We see the market as, at best, balanced over the next six months even with a high estimate of 700kb/d of substitution from gas to oil and with no OPEC+ increases after December. Our view is broadly in line with that of the Energy Information Administration (EIA) and is more bullish than that of the OPEC Secretariat, particularly for Q1. Our own and other models imply that extreme tightness is a market fear rather than a base case; however, OPEC+ has yet to address that fear."
Stanchart's sudden bullishness has been informed by OPEC+ latest meeting, a short and terse affair followed by a brief press release with no discussion of either crude prices or the spill-over from overheating gas markets. OPEC+ confirmed that it would stick to its July agreement to boost output by 400,000 barrels per day (bpd) each month until at least April 2022 to phase out 5.8 million bpd of existing production cuts.
In effect, the ministers failed to challenge the market narrative that assumes tight balances and an associated lack of spare capacity, meaning prices are likely to remain elevated for longer than anticipated. This also suggests that the oil producers are willing to defend a higher price floor than what many previously thought.
But just how high?
The bulls have received yet another shot in the arm after J.P. Morgan's global markets strategy team came out and encouraged investors to buy on any dips despite the recent spike in energy prices because the economy can support $150 oil.
"For instance, the economy and the consumer were functioning just fine in the period over 2010-2015, when oil averaged $100. Adjusting for inflation, consumer balance sheets, total oil expenditures, wages, and prices of other assets (housing, stocks, etc.) we think even with oil at $130 or $150 equity markets and the economy could function well (with some rebalancing at capital rotation)," JPM strategist Marko Kolanovic has said.
JPM is not the only ultrabull.
Opportune LLP says the U.S. economy is headed for pandemic-induced hyperinflation, arguing that what took five years to do with the last QE has now been duplicated in less than a year. The analysts say that with such rapid expansion of the money supply, it's only a question of when hyperinflation will hit. The experts argue that given the government's insatiable appetite for spending, the dollar could be set for massive devaluation that will propel WTI prices north of $180/bbl by the end of 2022.
With OPEC+ willing to defend higher oil prices and the Biden administration discouraging drilling at home, it appears that its sole option to push prices lower is to start selling its strategic oil reserves.