Energy

The oil market moved within striking distance of US$80/bbl yesterday, although it failed to break through this key level. Given the strength across the energy complex, it is probably only a matter of time before Brent finally breaches US$80/bbl. The forward curve continues to strengthen and the ICE Brent Dec’21-Dec22 timespread is trading in a backwardation in excess of US$7/bbl, up from less than US$4/bbl in August. A growing backwardation along the curve reinforces the view of a tightening market.

The situation we find ourselves in is not too dissimilar from 2018. That was the last time we saw ICE Brent break above US$80/bbl.

Back then there were concerns that OPEC+ was overtightening the market and so the group decided to aggressively ease cuts. OPEC output increased from around 31.8MMbbls/d in May 2018 to a little over 33MMbbls/d by November 2018. This saw Brent finish 2018 at close to US$50/bbl, having traded above US$86/bbl in October 2018.

With hindsight, the group should have shown more restraint, or at least ease more cautiously. OPEC+ will not want to make the same mistake this time around, particularly following the hard work they have put into rebalancing the market following Covid-19. The group has been cautious up until this point. However, it is still to be seen if they will continue to take this approach if calls to increase output at a quicker pace get louder.

While the scale of the deficit for the remainder of this year means that the market can absorb more than the currently planned 400Mbbls/d increase per month, the group will want to ensure that the market continues to draw inventories. This is particularly the case given that in 2022, the oil market is expected to be much more balanced.