While 2022 should still represent a reasonably balanced market as OPEC+ looks to boost supplies by around 4 million barrels per day (mmbpd) over the next 10 months, DBS Group Research analysts believe there could be oil price spikes towards US$80 per barrel or higher in late 2022 and beyond.
Factors include demand recovering to pre-pandemic levels, air travel recovering well into 2023 and OPEC spare capacity down to normalised levels, the analysts say.
"Thus, we introduce 2023 average Brent crude oil price forecast at an elevated level of US$85 to US$90 per barrel,” they add.
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The analysts note that the OPEC+ is in no hurry to boost production higher than planned. In its latest meeting, OPEC+ members decided to stick to the 0.4 mmbpd output increase despite calls for more production.
“The lack of material response from US shale drillers to the oil price increase so far seems to be one of the reasons that the OPEC+ bloc remains comfortable with oil prices above US$70 per barrel and enjoying the higher oil revenues,” they add.
The analysts highlight that oil bulls have been on a riot lately, as Brent crude oil prices breached US$85 per barrel driven by the ongoing energy crisis in parts of the world. Brent is currently hovering around US$83 per barrel, up 16% in the last 3 months, 60% year-to-date and 329% from the lows of last year.
Meanwhile, liquefied natural gas prices in Asia and Europe are hovering at US$25/MMBtu to US$30/MMBtu currently, compared to the levels of US$5/MMBtu this time last year as the demand supply mismatch in the gas sector has soared owning to muted upstream investments.
As winter approaches and inventory levels remain low, especially in Europe and even in North Asia, the analysts believe there will be fuel switching to oil. “If the coming winter is colder than usual, we could see higher oil demand,” they add.
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Given that the gas supply situation is unlikely to be addressed over the next few months, the analysts raise their average Brent crude oil price forecasts for 2021 and 2022 to a range of US$70 to US$75 per barrel and US$75 to US$80 per barrel respectively, from US$67 to US$72 per barrel and US$70 US$75 per barrel previously.
“Following the winter gas crunch, we anticipate both gas and oil prices to moderate in 1H22, before firming up again in 2H22 on the back of high season demand,” say the analysts.
Drilling activities are already creeping up on the back of high oil prices – the analysts point that rig utilisation has improved to the north of 80% and the market is looking to reactivate cold-stacked rigs as well as completed and half-built rigs.
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Shipyards like Keppel Offshore & Marine and Sembcorp Marine are benefiting from this trend, say the analysts. “Keppel’s stranded rigs and floating accommodation platforms should see higher utilisation ahead. Enquiries for production platforms should also pick up, translating into stronger order flows next year.
“This is particularly critical for SembMarine, whose order book has dwindled to $1.24 billion, way below annual revenue run rate of over $2 billion that is required to breakeven. Keppel is in a better position with a $5.5 billion order book and $3.1 billion order wins year-to-date, compared to peer SembMarine’s mere $600 million new wins.”
As at 2.35pm, Brent crude oil prices are trading down 0.50% at US79.88 per barrel.
