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Despite recent volatility big gains expected but what would it mean for markets?
Thursday 29 Jul 2021 Author: Tom Sieber

Guessing where the oil price will be in a year’s time feels like the equivalent of pinning the tail on the donkey except you are underwater and your hands are tied behind your back.

There are so many moving parts to the crude market and intangibles around what direction the economy might take.

Analysts at the big investment banks don’t have the luxury of sitting on the fence and instead must stick their necks on the line. Bank of America’s commodities team believe the recent drop in the price of oil to $69 per barrel, as producers’ cartel OPEC finally came to an agreement on production increases, is a buying opportunity and still expect Brent to hit $100 per barrel in 2022. At time of writing the price had recovered to $74 per barrel.

The bank’s prediction is partially based on a much broader recovery in demand from aviation sector by the middle of next year, to encompass the developing world. Bank of America says: ‘Once again, Indonesia and India have lagged while Brazil and Russia have pushed ahead with acceleration in flights. And China has yet to get back to pre-Covid levels when it comes to air traffic.

They also note that the new OPEC-plus agreement (the plus essentially being Russia) extends controls on supply through to 2022.


Let’s assume Bank of America is right – and notably it does not expect prices to stay at $100 for the duration of 2022 with an average price of $75 per barrel forecast – what would a move to this higher level for the first time since 2014 mean?

It would suggest the economy had continued to make a robust recovery in the wake of the pandemic. However, with oil prices effectively acting as a tax on growth, a rise to $100 could put this growth under some threat.

It might also be good news for the FTSE 100 given the heavy weighting for oil and gas firms BP (BP.) and Royal Dutch Shell (RDSB).

However, for these businesses a spike in oil prices could create a conundrum. The extra income it implies would be welcome but what they do with this extra income could become a source of some debate among shareholders.

How much of it should go on paying down debt will certainly be a key talking point. With the economics on oil projects looking more attractive, will there also be pressure to backslide on the commitment to a transition to cleaner sources of energy? Furthermore, will there be a clamour for more generous dividends?

You could file these issues in the category of being nice problems to have, but it does represent a real balancing act for those at the helm of these companies.

The risk is that decisions taken with the aim of making a quick profit from a higher oil price risk could lead to these firms’ long-term obsolescence in a carbon neutral world.

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