A year ago today, seasoned market-watchers looked on with horror as US oil prices crashed into negative territory for the first time in history and coronavirus ravaged the global economy.
Few of them could have foreseen the rapid turnaround in the fate of the global oil market. Now, Goldman Sachs analysts think WTI oil could soon shoot above $75 a barrel, from the US benchmark’s price of around $63 on Tuesday.
Prices have been propped up by huge supply cuts from the OPEC+ oil-producer cartel. And vaccine rollouts and massive government stimulus are expected to lead to rapid economic growth and demand for energy.
But analysts say there are risks on the horizon, including the fact that the pandemic has been far from contained globally.
April 2020: Oil prices plunge into negative territory for the first time
On April 20, 2020, oil prices became front-page news when they tumbled into negative territory for the first time ever, with WTI oil hitting -$40.
A wave of coronavirus lockdowns around the world had caused demand to dry up. Meanwhile, storage space for US oil was filling up fast. As a result, producers started paying buyers to take the black stuff off their hands.
“Last year proved that we hadn’t seen it all in the oil world,” said Bjornar Tonhaugen, head of oil markets at Rystad Energy. “Oil prices not only hit rock bottom, but they also broke the rock.”
Brent crude, the global benchmark price, also tumbled. It fell as low as $15.70 a barrel in April 2020, with the market still being rocked by an ill-fated price war launched by Saudi Arabia against Russia.
OPEC+ rides to the rescue
But the OPEC group of oil-producing countries eventually came together with others – including Russia – and slashed production dramatically, supporting prices by bringing supply closer to demand. Analysts say this is the key reason oil prices have pushed close to $70 in 2021.
“The only reason we do not have $30 [oil] today is because OPEC has been cutting deep since May last year,” Bjarne Schieldrop, chief commodities analyst at SEB, told Insider.
Saxo Bank chief commodities strategist Ole Hansen said OPEC, which is dominated by Saudi Arabia, cut its output by around 6.3 million barrels per day from the beginning of 2020 to the low point in June. He said it was currently around 3.5 million barrels lower.
Oil prices recovered sharply and hovered around $40 from July to November, when the arrival of coronavirus vaccines spurred a rally.
“The second phase really kicked off in early November,” Hansen told Insider. He said the vaccine news “let the market start to price in or look ahead to the recovery and what impact that would have on global mobility.”
Goldman Sachs sees US oil at $77 in 6 months
WTI oil was trading at around $64 on Tuesday, but analysts at Goldman Sachs said it could go as high as $77 within 6 months, a gain of 20%. The bank thinks Brent crude could rise 19% to $80 within 6 months, from around $67 on Tuesday.
The International Energy Agency last week increased its estimate of future demand once again. It has done repeatedly since the arrival of vaccines let countries start envisioning a return to normal life and all the economic activity and travel that entails.
Goldman is more bullish than most, however. Ehsan Khoman, head of emerging market research at Japanese bank MUFG, said in a note that “a vaccine-led, spring-accelerated global recovery will spur oil prices ‘overshooting’ in Q2.”
MUFG predicts WTI oil will hit $74 in the second quarter, while Brent crude will top $77. But it then expects prices to fall quite sharply as the market works out a new stable price level, with WTI oil falling to $61 in the final 3 months of the year.
Morgan Stanley’s base case is that WTI oil picks up to $67.50 by the third quarter before falling back to $62.50 by the end of the year.
Coronavirus and vaccine hurdles remain big risks
Yet analysts warn that there are risks to this much rosier outlook. A key one is that the coronavirus pandemic is still raging around the world, meaning a recovery in the global economy is far from assured.
Another is that the vaccine rollout could become delayed. Vaccine companies such as Johnson & Johnson and AstraZeneca have already faced problems, while the rollout has been slow in Europe and elsewhere.
Saxo’s Hansen said one concern for the oil market was that life after the pandemic simply requires less energy.
“When we get on the other side of the epidemic, are we going to work more from home than we did in the past?” he said. “Are we going to a fly across the world [for] business travel?”
Further out, governments’ renewed focus on climate change is of course the main issue for fossil fuels like oil. But Hansen said the green push is unlikely to make itself felt in the oil market in the next couple of years.
He said the story of the last year was quite simple: “OPEC+ found their voice.”