Neutral signals in the economy will allow oil to grow to $72-$74 per barrel

Анна Морина, банк «Открытие» 22 July 2021 13:41

The OPEC+ talks on Sunday, July 18, ended with a decision to extend the agreement until the end of 2022 and begin a planned monthly increase in production volumes by 0.4 million barrels per day (mbs) from August-as was proposed at the meeting on July 1. In addition, the participants agreed to increase the base levels of oil production by 1.6 mbs from May 1, 2022. They will be increased not only for the initiator of the UAE proposal (by 0.3 mbs), but also for Russia and Saudi Arabia (by 0.5 mbs each), and some other countries.

Following the results of the OPEC+ videoconference, the parties noted an improvement in the fundamental indicators of the oil market and a decrease in reserves in the OECD countries. The overall discipline of compliance with the agreement in June was 113%. Taking into account the assessment of the oil market prospects, it was decided in December 2021 to assess the market dynamics and the degree of implementation of the agreement, as well as to continue to adhere to the monthly assessment of the market condition in order to reduce the reduction volumes to zero by September 2022. The next meeting is scheduled for September 1, 2021.

The decision of OPEC+ was superimposed on a sharp change in the mood of market participants. The delta strain has led to a renewed increase in the incidence in almost all regions of the world. Even in the vaccinated UK, the number of new cases has again reached close to peak levels, but there are 5.5 times fewer hospitalizations and at least 13 times fewer (with a lag of 28 days) the number of deaths. The number of patients in hospitals still remains at about 10% of the peak, which is a good indicator, but the upward trend can be traced here. It becomes clear that vaccination does not provide sufficient protection against new strains. At the same time, there is no clear answer whether vaccination is able to sufficiently reduce the burden on the health care system, taking into account the increased contagiousness of new strains.

Information about the widespread increase in morbidity has led to a departure from risk in the markets. As a result, there is a characteristic decline in the main stock indices and an increase in demand for US government bonds, which led to a decrease in their yields below the level of 1.2%. Back in March, the securities were undervalued and their yield exceeded 1.7%, and now there is a reverse reaction of the market. Taking into account the Fed's rhetoric and high inflation, the level of 1.5-1.6% is more reasonable and we expect a correction of securities to this level.

As a result of the compromise reached by OPEC+, as well as the risks of a decline in demand against the background of another wave of morbidity, oil went below the level of $ 67.5/bbl at the moment. The decline in other commodities was somewhat smaller.

OPEC also presented the first forecast for 2022. It assumes an increase in the average annual global oil consumption by 3.3 mbs yoy to 99.86 mbs, while the mark of 100 mbs will be exceeded in the 2nd half of the year. Demand in the OECD countries will grow by 1.5 mbs due to growth in North and South America, demand in the US will be only slightly below the level of 2019, mainly due to low demand in the transport sector. Oil demand in non-OECD countries will grow by 1.8 mbs. In China and India, the growing dynamics will continue, growth will be 0.5 and 0.3 mbs, respectively (in 2021, an increase of 1.1 and 0.5 mbs) and will be supported by consumption in the petrochemical and transport sectors.

The volume of supply from non-OPEC countries will grow by 0.8 mbs yoy in 2021 and by 2.1 mbs in 2022 to 65.90 mbs, oil production in Russia will grow by 0.4% in 2021 and 4.1% in 2022, but will remain 4.6% below the level of 2019.

By Wednesday, June 21, 2021, the markets began to recover the losses of the beginning of the week, Brent crude oil returned to a more reasonable $70 per barrel. This week we are following the ECB news and economic statistics. With signals of a slowdown in the recovery of the leading economies, oil prices may go to the $68-$70 per barrel zone. With neutral or positive signals, an increase in the zone of $72-$74 per barrel is possible.

Anna Morina, Head of the analytical department "Otkritie Research "of Otkritie Bank.

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