Oil Prices Extend Gains Amid Tight Supply


Tuesday October 26, 2021 / 12:10 PM / by United Capital Research / Header Image Credit:  Deccan Herald

Last week, Brent crude recorded gains for the ninth consecutive week, its longest streak since 2015. Year-to-date, Brent has returned a whopping 103.5%, with the current bull run attributable to tight market supply and amid improving demand globally.

The recent oil rally is the outcome of a recent global market imbalance caused by oil production constraints (such as outages in US oil infrastructure due to natural disasters), coal shortages and a jump in natural gas prices, as well as OPEC+'s unwillingness to boost output. In the medium term, the upward trend in oil prices appears inevitable. This was affirmed in a recent town hall with US President Biden, in which he stated that energy prices would continue to rise unless OPEC+ and its members increased supply, which OPEC+ and its members are unlikely to do. Also last week, swing producer, Saudi Arabia, reiterated OPEC's plan to maintain its cautious approach to managing global crude supplies amid improving demand, citing the cartel's intent to avoid flooding the market with increase stockpiles ahead of 2022. 

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Looking ahead, we expect the oil market rally to be sustained, boosted by the continued economic recovery globally. In the short term, we expect rising demand for fossil fuels as a coal substitute to sustain demand for crude. In terms of supply, we expect OPEC+ to maintain its current monthly output increase of 400,000 barrels until April 2022. However, with oil prices at $85 per barrel, there remains some downside, since higher prices could encourage high-cost shale companies to drill more, potentially tipping the market balance. Overall, we expect increased shale production to have a modest impact on oil prices in the near term, as long as OPEC+ output remains within its agreed output agreement.

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