Oil prices are trading at about $75 per barrel, which is 20% higher than the average price level in the relatively stable period of 2017-2019. The driver was an active recovery in demand against the background of limited supply from OPEC+ and the temporary stagnation of shale production in the United States.
Last October, when oil prices were trading around $35 per barrel, none of the 50 analysts polled by Reuters could predict the current rally. The most optimistic forecast belonged to the specialists of a small agency Stratas Advisors, who expected $60 per barrel in the second quarter of 2021. In second place was Goldman Sachs with an estimate of $57.5 per barrel.
Now there is a discussion in the public space about the possibility of $100 per barrel of Brent. The last time this could be observed was in the fall of 2018, against the background of a similar jump in quotations before the resumption of anti-Iranian sanctions. In the third quarter of 2021, the above-mentioned Stratas Advisors and Goldman Sachs are waiting for $75 and $80 per barrel, respectively. The consensus forecast for 2021 is $67.48 per barrel of Brent.
Today's forecasts are clearly optimistic, and corrective risks are ignored. Nevertheless, these risks exist and can lead to a sharp change of sentiment, as has happened many times in the past. We have collected the key risks that should be monitored in July.
New COVID-19 outbreaks
While the Indian strain of COVID-19 (Delta variant) is becoming increasingly widespread in Europe, analysts are wondering whether the next mutation may not be resistant to modern vaccines and whether world governments will have to resort to hard lockdowns again? There is no specific answer to this question, so the level of uncertainty here remains high. In the case of new lockdowns, oil demand will be hit, which may lead to a significant revision of forecasts and lower prices.
The growth of Iranian exports
The course of indirect negotiations between the United States and Iran suggests that the lifting of sanctions on the Iranian oil and gas sector is only a matter of time. The key uncertainty here is in the timing: the timing of reaching an agreement and the timing of the subsequent restoration of Iranian production. The potential for production growth is 1-1.4 million b/d, which can be fully exported. In addition, since the beginning of the year, Iranian storage facilities have accumulated a surplus of about 70 million barrels, which can also enter the world market.
If these barrels enter the market gradually, then OPEC+ can smooth out the negative effect, and a strong reaction of quotations will be avoided. But if the supply increases within one or two months, as some Iranian officials have stated, this could put serious pressure on prices.
Weak demand in developing countries due to high prices
The oil market is inelastic. In many industries, there is nothing to replace it, so the price increase does not lead to a similar drop in consumption. But everything has a limit. During the presidential term of Donald Trump, the American leader regularly criticized OPEC+ when prices rose above $65 per barrel, because it made gasoline too expensive for the American consumer.
In the spring of this year, a similar conflict occurred between India and Saudi Arabia. The Indian representative criticized the policy of OPEC+, which caused prices to rise, to which he received in response an offer to use the oil reserves accumulated in 2020.
At current prices above $70 per barrel, fuel costs are becoming a heavy burden for many enterprises, which can slow down the economic recovery and naturally lead to a cooling of demand and lower prices.
The growth of the US dollar
Against the background of rising inflation, the risks of tightening the Fed's monetary policy have increased, which will lead to a strengthening of the US dollar. The jump in the dollar in mid-June against the background of the first "hawkish" notes in the Fed's statement provoked a correction in oil by almost 4%. If the situation worsens, oil and other commodities may be under pressure.