Rising Oil Prices Could Kill Off Recovery

In our "What next for oil prices", published in May we expected oil prices Bent Crude basis to average $66 dollars in the third quarter of the year.

Prices closed last week at $76 dollars. The OPEC delay to any decision on output increases didn't help. The US administration is voicing concerns as the market tests the $75 dollar level.  OPEC concerns rise as fears of "Demand Destruction" loom.

Analysts on Wall Street believe oil prices are on track to climb significantly beyond $80 a barrel in the coming months, potentially even surpassing triple digits as soon as next summer.

Goldman Sachs sees international benchmark Brent crude averaging above $80 in the third quarter, with potential spikes “well above” that level as demand comes roaring back.

JP Morgan expects crude oil prices to “decisively” break into the $80s during the final three months of the year. Morgan Stanley believes Brent will trade between $75 to $80 through to the middle of 2022.

Analysts at Bank of America, however, are even more bullish. They argue Brent prices could see $100 in the summer of next year.

All three of the world’s main forecasting agencies, OPEC, the International Energy Agency and the U.S. Energy Information Administration, expect a demand-led recovery to pick up speed in the second half of 2021.

Crude markets are searching for the price that would start to destroy demand growth. The US administration fears we may be already there. OPEC is anxious to avoid that fate. The cartel may look to hold prices above $70 dollars but sooner or later the US oil rigs must respond to the call.

For inflation fears to abate, the drop below $70 dollars would provide significant reassurance ... As for policy ... as Sebastian Wallaby [Foreign Relations] reported this week,

In the Fed we trust, inflation will likely subside and the age of the magic money tree will continue to flourish in the rich forests of Planet ZIRP ... (OK I added the bit about the forests).
Sebastian Mallaby is Paul A. Volcker Senior Fellow for International Economics at the Council on Foreign Relations