A combination of constructive demand growth stemming from vaccines, stimulus and reopenings and inelastic supply outside of core Opec+, has kept oil markets in firm deficit territory, continuing to propel prices higher, a report said.

This has resulted in Brent crude rising 45% year-to-date, added the latest Oil Market Weekly report from Mitsubishi UFJ Financial Group (MUFG), a Japanese bank holding and financial services company.

MUFG’s modelling estimates point to global demand rising from 95.8 million barrels per day (b/d) in Q2 to 98.9 million b/d in Q3, as the US passes the baton to Europe and major emerging markets, where even India is beginning to show encouraging signs of a recovery.

With such phoenix-like demand growth against an almost inelastic supply curve outside of core Opec+, the global oil market is facing the deepest deficit since last summer (2.1 million b/d in Q2 and widening to 2.3 million b/d in Q3), the MUFG report said.

Prompt timespreads – the best indicator of market tightness given they price fundamentals and not expectations – corroborate with this market tightening, rallying to multiyear highs this week and in firm backwardation.

“Put together, this reinforces our bullish oil conviction, and we continue to forecast Brent ending Q2 and Q3 at $77/b and $73/b, respectively, and we do not rule out sporadic spikes above $80/b over the summer,” MUFG said in the report.

Oil remains upwardly mobile, with Brent flirting at 32 month highs of about $75-76/b, fuelled by the sheer velocity of the anticipated vaccine-accelerated demand surge continuing in earnest, juxtaposed against inelastic supply.

“As in recent weeks, we continue to remain bullish and for the week ahead look for further evidence of demand strength, falling inventories, rising premiums and the forward curve in steeper backwardation,” the report said.

Oil price forecast

“We expect a significant ramp-up in global oil demand over the summer, buttressed by pent-up savings and limited scarring effects from the virus. This is central to our February thesis (see here) as to why we expect oil prices to “overshoot” (Brent ending Q2 at $77/b) and remain in the 70s over the summer,” the report said.

“Thereafter by Q4, we see oil prices gradually regressing back towards the equilibrium price for the oil industry, which we view as being centred on the current anchor near the long-term marginal cost of production and support of about $55-65/b for Brent.” – TradeArabia News Service