Brent prices climbing above $80 per barrel for the first time since the pandemic started is a significant market event and highlights how the balance has changed dramatically, from global demand destruction and negative prices to supply tightness as demand returns.
It is only now that the market is feeling the supply damage the Covid-19 pandemic brought, as the production capacity destruction was hidden behind the veil of the damaged demand, until recently.
The more than $10 per barrel upswing in Brent this month is a result of the imbalance between the returning demand and the tight supply.
Demand is also offering some more upside potential as winter approaches and the global energy crunch intensifies.Â
Some gas to oil switching is expected for Asia as well in the next two quarters as a result of the strong LNG price environment, which will strengthen oil demand even further.
Traders only have until 29 September 2021, the expiration for trading Brent October futures, to decide whether $80 per barrel is a high enough price for profit-taking, or if instead the steep backwardation in futures and analyst chatter of $90 per barrel is warranted, and decide to keep swimming with the current.
On the bearish side, Asia faces two formidable foes – both the energy crisis and potential contagion from a Chinese housing bubble many warn is on the verge of bursting, put GDP, and as a result, oil demand, at risk.
If Chinese GDP disappoints in the short-term and there is a market domino effect, oil demand may not reach our projected forecast of 99 million bpd by December 2021, and the upward ascent in oil prices could require a reassessment.
