After 2020, the energy sector becomes the best performer of all 11 U.S. market sectors in 2021. the Energy Select Sector SPDR ETF is already up 46.2% this year. By comparison, the S&P 500’s 12% gain looks tame.
Several countries in the US and Europe have reopened their economies due to the successful launch of the new crown vaccine and the gradual recovery of the global economy. Oil prices have also stabilized for now: WTI crude prices broke the $70 mark on Monday, and Brent crude also found support around $70 per barrel.
OPEC+ said they are still sticking to their previous production plan to gradually increase output. Analysts widely expect OPEC+ to reaffirm its plan to increase production by 840,000 barrels per day from July 1 at next Tuesday’s meeting. This indicates that the market is confident of absorbing the additional supply as economies reopen. Russian Deputy Prime Minister Alexander Novak said on Wednesday that Russia expects the global oil market to have a current shortfall of about 1 million barrels per day.
Wall Street remains optimistic about the oil sector, with some analysts saying oil prices will reach $80 a barrel this summer.
John Kilduff of Again Capital predicts that Brent crude prices will rise to $80 per barrel in the summer and WTI crude will be between $75 and $80 due to strong gasoline demand. Brent crude is currently trading at $71.63 per barrel, while WTI crude is trading at $69.13 per barrel.
Francisco Blanch, global commodities and derivatives strategist at Bank of America, said.
“The economy is growing at a very fast pace due to strong transportation demand, the reopening of Europe, and the fact that the Indian epidemic seems to have hit an inflection point. I think that market liquidity is also returning.”
Blanch is very optimistic about the long-term trend of oil prices, which he expects to hit $100 per barrel in the next two years. He said.
“We think that oil prices could rally to $100 per barrel within the next three years (2022 or 2023). On the one hand, OPEC+ holds the initiative as the market is not particularly responsive to prices on the supply side and a lot of demand is suppressed. On the other hand, the current inflation situation is relatively severe. Oil prices have been rising at a rate that lags behind the growth of the economy as a whole.”
However, some experts have warned that high oil prices may not be sustainable in the long term.
Daniel Yergin, vice chairman of IHS Markit, said that high oil prices may not be sustainable in the long run due to political interference. He argued.
“It would be incredible if oil prices could rise to $80, when the market would react. The rise in oil prices will start to affect demand, and it will also trigger a political reaction. President Biden has a lot of experience in politics and he knows that high oil prices will be a problem no matter who becomes president. This is true even in an era of energy transition.”
A bigger risk: a resurgence of U.S. shale oil could muddy the crude market.
The U.S. oil industry is currently producing about 11 million barrels a day, down from about 13 million barrels before the outbreak. However, many analysts are not sure how fast U.S. shale oil will fully recover.
An authoritative analysis by the Oxford Institute for Energy Studies says higher oil prices could bring U.S. shale oil back to the market significantly in 2022 and could upset the delicate balance of the global oil market. The institute stated.
“As we move into 2022, the recovery of U.S. shale oil will add to the uncertainty of oil prices. As in previous cycles, U.S. shale oil will remain a key factor in market outcomes.”
The agency listed several possible scenarios that could put oil prices under pressure in the future, one possibility being a glut of crude oil.
At a recent meeting, OPEC+ said it expects global oil demand to increase by 6 million barrels per day in the second half of this year. Analysts Fattouh and Economou say that if U.S. shale production grows to a ceiling of 1.22 million barrels per day and global demand recovers less quickly than expected, there could be a glut in the crude oil market by the fourth quarter of 2022.
In other words, even a only partial recovery in U.S. shale oil could be enough to upset the delicate balance OPEC+ has established in the market so far.
It will probably take at least two years for U.S. shale oil to pick up significantly, so investors can breathe a sigh of relief for now. For now, most shale oil companies are reluctant to invest, preferring to pay down debt and raise dividends. Investors have been pessimistic about companies that continue to drill aggressively, and that sentiment is unlikely to change anytime soon.