Banks stand firm on calls for oil ‘supercycle’ even as price drops

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Banks calling for an oil “supercycle” have said the 15 per cent tumble in the price of crude in recent weeks marks a pause rather than the end of what they see as a sustained move higher.

International benchmark Brent crude has fallen from a 14-month high above $71 a barrel on March 8 to a low of $60.50 on Tuesday, when prices tumbled 6 per cent. Prices had rallied 84 per cent from November to the recent peak.

Traders were betting that demand would rebound sharply as Covid-19 vaccines rolled out around the world, but delays to inoculations and stricter lockdowns in Europe have hit short-term oil consumption, while growing inflation concerns unsettled wider financial markets. New hedge fund bets on rising oil prices have slowed sharply in recent weeks, according to exchange and regulatory data.

But banks including JPMorgan, Goldman Sachs and Barclays have in recent days either reiterated their long-term bull case for oil or even increased their forecasts for prices.

Analysts at Barclays said on Tuesday that they were raising their Brent forecast to an average of $66 a barrel in 2021 and $71 a barrel in 2022, arguing they still see demand rebounding in the second half of this year.

Christyan Malek at JPMorgan, who was one of the earliest proponents of the theory that the oil industry is heading into a new supercycle — or a prolonged period where demand starts to outstrip supply — said that while the “correction” in the price would not be welcomed by the industry, it would ultimately reinforce the longer-term rally.

“At the oil market level it’s the kind of medicine the industry needs as it keeps big producers cautious and further slows investment,” said Malek, who earlier in 2021 argued there was a risk oil could soar above $100 a barrel in the coming years. The bank believes Brent could average $74 a barrel in 2022.

“On balance this correction could end up being quite constructive for the price as it keeps the brakes on capital, which is what you need for a supercycle to develop,” said Malek.

Late last week analysts at Goldman Sachs said they saw the price decline as a “buying opportunity”, maintaining their forecasts for Brent crude to hit $80 a barrel within the next few months.

The rally earlier this year was stoked, in part, by fears that the coronavirus-linked slump in 2020 had curbed investment in future supplies and permanently slowed the growth of the US shale sector.

That has handed more power to large producers such as Opec and Russia, which have been restricting production until demand recovers when the pandemic is brought under control. Some analysts see demand starting to outstrip supply in the coming years even if Opec members restore output, as western oil majors shift their focus towards renewable energy sources.

Rystad Energy, a consultancy, said the oil market had become complacent about the threat the pandemic still posed, with tighter lockdown measures introduced in Germany, France and other European countries likely to hit consumption by motorists.

“Road fuels was the market segment that took the oil demand recovery by the hand, pushing overall liquids demand higher after last year’s plunge,” said Bjornar Tonhaugen at Rystad.

The so-called Opec+ group, including non-members such as Russia, is expected to proceed cautiously given the recent price slide when it meets next week. Saudi Arabia potentially could further delay the return of 1m barrels a day in additional production the kingdom has cut in excess of its target.

“We think the kingdom might not entirely reverse the unilateral cut this year,” said Barclays analyst Amarpreet Singh.

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