Forecasts for Oil Prices Get Decidedly Bullish

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Written by Daniel Graeber for Industrial Info Resources (Sugar Land, Texas)--The price of oil is on pace for a major upward cycle following the OPEC+ decision to trim production allotments, with several estimates pointing to Brent moving above $100 per barrel.

Brent crude oil, the global benchmark for the price of oil, was trading at around $97 per barrel on Monday in a trading session thinned a bit by a federal holiday in the United States. Brent jumped 11% during the first full trading week of October, after ending the prior month at $87.96 per barrel.

Late 2021 supply-side pressures combined with pent-up demand to create some inflationary pressures. The substantial geopolitical risk premium that emerged after Russian military forces entered Ukraine in late February only compounded those pressures due in no small part to the spike in commodity prices that followed the invasion.

U.S. President Joe Biden has spent much of the year trying to arrest some of those pressures using everything in his arsenal, from the release of strategic reserves to considerations of an export ban to keep as much supply at home.

So it was understandable that the Biden administration was incensed by the decision from the Organization of the Petroleum Exporting Countries and their non-member state allies, a group dubbed OPEC+, to trim their production quotas by 2 million barrels per day come November. There was already talk of a higher-for-longer outlook for crude oil prices and last week's decision only solidified that position.

OPEC+ really can't cut that much given that most parties to the agreement couldn't meet the higher quotas anyway, but the decision during already-tight times was decidedly bullish.

Jorge Leon, a senior vice president at Norwegian consultant group Rystad Energy, said that even if OPEC+ was able to cut only 60% of what it promised, it would still compound the supply-side pressures gripping the market.

"We believe that the price impact of the announced measures will be significant," he said in a research note. "By December this year Brent would reach over $100 per barrel, up from our earlier call for $89 per barrel."

As commodity prices account for the bulk of the increase in consumer prices, it was no small surprise to hear the alarm bells ringing at the International Monetary Fund (IMF). The IMF's outlook has darkened considerably this year. It said last week that the "senseless war" in Ukraine has created a "cost-of-living crisis" in most major economies.

OPEC, however, said the decision was meant to address the uncertainty that surrounds the global economic outlook. Most major economies are flirting with, or are already in the grips of, a major recession and what seems to be the simultaneous tightening from the world's central banks could make matters worse.

Should the OPEC+ decision trigger a significant amount of demand destruction, it would both verify the group's outlook but be self-defeating as sinking demand drags on prices.

But for now, it's still up and away for crude oil. The market will only get tighter from here because Europe is working to cut waterborne crude oil imports from Russia by December, sidelining one of the world's major producers as punishment for the war.

Swiss investment Bank UBS sees Brent at around $110 per barrel by December. For its part, London oil broker PVM put out a list of "what if" scenarios, ranging from another release from U.S. strategic reserves to removing the immunity that protects members of OPEC from antitrust lawsuits.

But it's still bullish.

"Our guess is as good as anybody else's, but the new situation is forcing us to increase the Brent price forecast to around $110 per barrel for the first half of next year with two caveats," PVM's analyst wrote. "Inflation-induced economic headwinds will make sure that the road up there will be bumpy and will not be paved with good intentions and the estimate is subject to regular revisions due to the turbulent and unpredictable political and economic climate."

Industrial Info Resources (IIR) is the leading provider of industrial market intelligence. Since 1983, IIR has provided comprehensive research, news and analysis on the industrial process, manufacturing and energy related industries. IIR's Global Market Intelligence (GMI) helps companies identify and pursue trends across multiple markets with access to real, qualified and validated plant and project opportunities. Across the world, IIR is tracking over 200,000 current and future projects worth $17.8 Trillion (USD).