The big question now for oil is where the U.S. dollar goes. Oil is priced in dollars and a strong dollar tends to hurt oil prices.
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A bet on $100 oil has gone from a long shot, to a bullish Wall Street estimate, to maybe not even high enough. More analysts are convinced that oil is going to rise above $100 this year, and now they are starting to predict even bigger numbers.
Both Morgan Stanley and Bank of America analysts are getting even more bullish on the oil outlook, as inventories of oil have declined and oil companies are ramping up production slowly. Oil prices are up this year, with Brent crude futures, the international benchmark, trading at $87.50 a barrel on Friday.
Morgan Stanley analyst Martijn Rats thinks that slow-growing oil supply is going to put more pressure on prices to rise. The only way that prices will stabilize or fall is if demand falters. And that’s only likely to happen at higher prices, in his view. For now energy remains a relatively small part of gross domestic product, and thus it’s not yet due for a correction.
“If Brent were to stay at $88 per barrel, spending on oil would amount to about 3.5% of global GDP this year,” he wrote in a note published late on Thursday. “That is still modest in a historical context — it averaged about 4.5% consistently throughout 2011-14. To reach that percentage again, Brent would need to rally to about $110 per barrel, although sizable regions of the world would already be at an oil-burden-on-GDP equal to the 2011-14 level if Brent were to reach $100 per barrel.”
Rats raised his forecast for Brent crude to $100 from $90 for the second half of 2022 and the first half of 2023.
Bank of America analyst Francisco Blanch sees Brent headed to $120 per barrel by the middle of the year. He notes that some economies are still sputtering, and oil demand isn’t quite at prepandemic levels. “Yet a resumption of international air travel on vaccines and prophylactics could pave the way for the endemic phase of Covid-19, enabling oil to benefit from pro-cyclical tailwinds,” he wrote.
The big question now is where the dollar goes. Oil is priced in dollars and a strong dollar tends to hurt oil prices. Bank of America expects the dollar to stay strong, which is one reason Blanch thinks that oil could fall back to $80 in the second half of the year.
“Yet a pro-cyclical global macro backdrop could support crude near triple digits in the second half of 2022 if the dollar weakens,” he wrote. “In our view, two key conditions could trigger a weaker U.S. dollar and support oil: more China policy stimulus and a less hawkish-than-expected Fed.”
Write to Avi Salzman at [email protected]
