The oil market is expected to stabilize in 2021. (Image: Shutterstock.com/Iurii)
The oil market will stabilize in 2021 and oil will continue its price rally. Michel Salden from Vontobel AM sees potential for price increases of over USD 60 by the middle of the year. Other raw materials are also clearly on the up.
“Most raw materials are currently on a lucky streak,” says Michel Salden, Head of Commodities at Vontobel Asset Management. Even oil, which is still struggling with weak demand, has the potential to trade above USD 60 by the middle of the year thanks to the recent unilateral Saudi Arabian production cuts. The recovery in commodities results from the positive combination of the ailing USD, the economic recovery from the Covid-19 shock, the stimulus measures by the central banks and increased government spending on infrastructure projects, according to Salden.
All cyclical commodities, including soybeans, corn and sugar, are currently in backwardation. This means that the forward rate is below the expected spot rate at the due date or expiry of the forward month (delivery date in the future) – a circumstance that is primarily due to the imbalance between supply and demand.
Even grains that have been on a downward path since 2012 have rallied more than 45% in the past six months, due to the La Niña-induced droughts in Latin America and China. “This has led these countries to build up their strategic reserves. In addition, the markets run the risk of underestimating the consequences of inflation expectations, as all the major central banks are showing reluctance to normalize their monetary policy, even if inflation above 2 , Should rise 5%, “says Balances.
Saudi Arabia is stabilizing the oil markets
At the last OPEC meeting, Saudi Arabia surprised the markets by announcing a unilateral production cut of 1 million barrels per day (mbpd) for February and March. This cut offsets the increase in production that Russia and Kazakhstan had called for, especially to meet domestic heating needs in winter. “As a result, oil’s strong price rally towards USD 55 (for Brent) continued,” said Salden. Saudi Arabia is aiming for further depletion of inventories in the first quarter, although a seasonal build-up in global oil stocks would normally be observed. This allows the OPEC + cartel to ramp up production in the second quarter as soon as the vaccine and warmer temperatures are likely to increase mobility and demand for oil. Current oil demand is still fragile due to lockdowns in Europe. The recovery of flight activity remains crucial. Asia gives hope as activity there has already completely recovered.
As Salden further explains, the measures taken by Saudi Arabia will lead to a daily reduction in oil supply of more than 1.4 mbpd in 2021, which will lead to a complete dissolution of excess storage on land. The floating bearings at sea and in oil tankers have already been dismantled. In addition, Saudi Arabia seems willing to lend a helping hand to Russia in order to pave the way for friendly negotiations on production increases in the second quarter.
Rise in shale oil production capped by ESG trends
Russia fears that shale oil production will pick up again if oil prices rise too fast and too high. The free capacities outside of OPEC + are limited, however, as a resurgence in shale oil production is capped by ESG trends, which lead to higher financing costs. “This should help the cartel regain control of the market. It is also unclear whether the new Biden administration will allow Iran to export oil later this year. Therefore, oil prices have the potential to continue to rise, with Brent up to In the middle of the year it is likely to trade above USD 60 and even in stronger backwardation, “concluded Salden.
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