I am increasing my December West Texas Intermediate oil price forecast by $2.50 to $42.50 to $52.50 per barrel for January 2021.
Oil prices have been range bound in the upper $40s throughout December. OPEC+ has been cooperative, and many expect it to increase production by up to 500,000 barrel per day for February. The Financial Post has a Bloomberg article “Russia’s Novak Backs Further OPEC+ Oil-Output Hike in February” on December 25 by Olga Tanas (Twitter link) stating the following:
“To restore our output, that we’ve reduced a lot, the price range of $45 to $55 a barrel is the most optimal,” Deputy Prime Minister Alexander Novak told reporters in Moscow. “Otherwise we’ll never restore production, others will restore it.”
“If the situation is normal, stable, we will support the increase,” Novak said, when asked if Russia wants a further hike of 500,000 barrels a day in February. “We must reach levels that were envisaged earlier, from Jan. 1, gradually, without pulling the market too much.”
Please note that Novak is referring to Brent prices in the above quote. Brent prices are typically about $3 higher than WTI prices.
While there is concern that rising COVID-19 cases in January and possibly February might damp oil prices, especially with the new UK strain, vaccinations should accelerate from their slow start, which ought to help support prices. As we roll further into 2021, I expect more progress in controlling the pandemic and more optimism toward higher oil prices.
Furthermore, I expect oil equities to move higher with rising oil prices, though not to the same levels they were at prior to the outbreak of COVID-19. With the worldwide movement to consume less fossil fuels, many investors will avoid the oil and gas sector.
I have not mentioned the change in the US administration in deliberating my forecast because I do not believe it will have any immediate effect. Further out in time, I will weigh its policies and how they may affect oil prices. One policy change, of course, that everyone is watching is how the US will address the Iranian situation. My intuitive guess is that, by the time the issues are resolved, the world may be able to accommodate the additional production. In general, though, until we learn more how the new administration repositions its policies, I am taking a wait-and-see approach.
I want to wish everyone a Happy, Healthy, and Prosperous New Year!