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Oil: The Bet Of The Oil Nations

Oil prices continue to rise after oil nations decided to surprise them by keeping their production limits. Oil policy tends to be more effective in today’s market environment, and oil nations seem to have no scruples in exercising their temporary powers.

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With supplies more decisively restricted, we at Julius Baer improve our forecasts and see oil prices moving well above $ 70 a barrel in the coming months. Oil policy remains the key risk element, especially as some emerging markets are beginning to experience fuel inflation.

Politics Of The Oil Nations Remain Difficult To Predict

The result of the meeting of the oil nations in recent days surprised the market. The group decided to keep current production quotas until April, against expectations that saw incremental relaxation.

Russia and the Caspian producers negotiated small exceptions. In fact, oil prices appear to be slightly above fundamentals. However, the market correctly anticipates a new adjustment. Demand outstrips supplies, storage is shrinking and the coming months should see a rebound in travel and leisure activity, which will increase the use of oil in the Western world, which still accounts for the majority of demand.

Rebound In Chinese Demand

Meanwhile, the rebound in Chinese demand has apparently reached its limit. With the shale business in a paradigm shift that prefers cash flows to growth, the supply response to high prices from free-market producers seems duller this time. The straightjacket of sanctioning Iran's oil business has a similar effect. Yet oil prices are already contributing to critical inflation pain in some emerging markets like Brazil or India, and their voices and unease will only grow. A further increase would also begin to hurt American consumers.

The stage is set for oil politics and further confrontation. With supplies more decisively restricted, we see more upside in the near term and raise our quarterly forecast for the remainder of 2021 by $ 5 a barrel. We maintain our point of view, but we still see the oil market in a temporary and very advanced rebound, as supplies are constrained politically and not structurally.

Article By Norbert Rücker, Next Generation Director of Economics and Research, Julius Baer

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