The Most Fragile Oil Price Rally In History

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By Irina Slav

Brent crude could hit $70 or even $80 a barrel by the end of this year, one hedge fund manager says. It could top $100 next year, an energy analyst forecasts. Oil is on a tear, and suddenly, everyone is bullish. But this is probably the most fragile oil price recovery in history. Something as tiny as a virus could kill it.

Herd immunity is the big factor for hedge funds, according to a recent Reuters report. According to them and several banks, the United States—the world’s biggest oil consumer—will reach herd immunity by the middle of the year, which will coincide with summer driving season to the benefit of oil producers.

“By the summer, the vaccine should be widely provided and just in time for summer travel and I think things are going to go gangbusters,” one hedge fund manager, David D. Tawil of Maglan Capital, told Reuters.

Government stimulus will also help. In fact, it could even push prices to $100 and over, according to Energy Aspects’ Amrita Sen.

“We’ve always called for $80 plus oil in 2022. Maybe that is $100 now given how much liquidity there is in the system. I wouldn’t rule that out,” Sen told Bloomberg this week.

Central banks and governments have been more than generous with stimulus to weather the effects of the crisis caused by the pandemic, and while some are skeptical about the long-term benefits of some measures, the overall sentiment towards them is positive.

There are some flies in the stimulus ointment, however. In Europe, some analysts are warning that government support for businesses is creating so-called zombie companies that will collapse the moment the stimulus end, which it will eventually have to do. In the United States, some analysts have questioned the need for President’s Biden $1.9-trillion stimulus program saying the economy is already picking up, however slowly, and a stimulus package as huge as this one could lead to excessive inflation, which could have unexpected consequences.

And then there are the oil producers, many of which have been struggling to stay afloat since the pandemic hit the global scene. With rising oil prices, the struggle will end, but it will also tempt many to start producing more, especially as demand recovers thanks to mass vaccinations.

This is the dominant expectation: that by the summer, there will be enough people vaccinated for life to begin to return to normal, including in oil demand. Analysts and financiers note that oil companies are much warier about production growth this time and will hold off returning to growth mode for longer. This may or may not be the case, but what most analysts and financiers seem to be brushing off is the possibility of a resurgence in Covid-19 infections.

It is not a thought many would readily entertain, not after the months of lockdowns and travel restrictions that decimated air travel and oil demand alike. Yet medical experts in senior positions such as the director of the U.S. Centers for Disease Control are warning that the new variants of the coronavirus that caused the pandemic could indeed lead to new spikes in infections. These variants appear to be spreading faster than the original virus, medics have said, but the bigger problem is that the vaccines we have available may not be effective against them.

“They’re more virulent, can cause more death, and some of them may even escape the immune response, whether it’s natural or from the vaccine,” said Dr. Celine Gounder, member of the Biden-Harris Transition Covid Advisory Board last week.

This is all it would take for bullish oil price forecasts to crash and burn: another resurgence in cases and the news that available vaccines don’t work against the new virus variants. It may well be this risk that is making producers so unusually wary about their return to production growth. This wariness, coupled with OPEC+’s continued cuts, would likely limit oil’s downside potential for a while, even if new Covid-19 cases do start to rise again in any of the biggest oil markets.

Interestingly enough, the hedge funds Reuters interviewed don’t seem to factor in the shift to renewable energy that is expected to depress oil demand permanently. On the contrary, despite many a government’s green transition plans, financiers expect a bright future for oil, not just this year and next.

“Oil companies, for the first time in a long time, are likely to make a big comeback,” Jean-Louis Le Mee, chief of hedge fund Westback Capital Management told Reuters. “We have all the ingredients for an extraordinary bull market in oil for the next few years.”

It is an interesting situation: governments and environmental groups are pushing for less oil and more renewables as soon as possible, touting the falling costs of solar and wind, and the breakthroughs in storage. Those who trade oil, on the other hand, expect a recovery in demand strong enough to lift prices to where they were before the pandemic and before the announcement of all these energy transition plans. It would be fascinating to watch who ends up correct.

Crude Oil

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