Why oil could be set for a supercycle

When oil prices briefly rose above $70 a barrel in March for the first time in more than a year, investors were quick to see it as a sign that higher prices were here to stay.

Since then, the price of crude has bounced up and down nervously along the way, revealing little about its future direction and prompting investors to wonder whether the rally that began last November is reaching an end or is the start of even better things to come.

Jeremy Naylor, a markets analyst at IG, the spread-betting firm, argues that the principal influence on the oil price is concern over how Covid-19 will play out. While the US and the UK have already had considerable success with their vaccination roll-out programmes, he says that delays in the EU are a reminder that the challenges brought about by Covid-19 will be with us for some time yet.

“If nations get a grip on the pandemic, then fine, but I don’t think we have seen the end of Covid-19.”

That makes the region’s handling of the virus, and its resulting economic impact, of critical importance to the oil price over the next few months.

A second unknown is whether the Opec+ oil alliance will continue to present the world with a united front to support the price of crude.

Opec+ has agreed to slowly relax output cuts following US calls on Saudi Arabia to keep fuel affordable. Opec recently reiterated its forecasts of a robust economic recovery this year, with growth in the US and China offsetting the devastating effects of the pandemic in India.

In a report, it said that demand would rise by 6m barrels per day. The organisation predicted global economic growth at 5.5 per cent, up from 5.4 per cent in April.

What will drive the price of oil?

Many analysts remain bullish on the oil price. Several leading banks, including Goldman Sachs, Barclays and JP Morgan, have reiterated optimistic positions, with some even raising their price estimates in recent weeks.

Barclays is just one of several global financial institutions that think the world is at the beginning of an oil “supercycle” in which demand will outpace supply for the foreseeable future.

Malcolm Graham-Wood, oil analyst and founding partner of HydroCarbon Capital, agrees. Beyond the short-term downward pressure on prices, he says there will be a “huge pick-up” in demand in the second half of the year as Europe gets to grips with mass vaccinations, and populations across the industrialised world begin to spend money, travel and begin the return to normal life.

“By the autumn, if not before, people will be gagging to travel and spend all the money they’ve been saving, and that is going to represent a huge boost in demand for oil,” he says. “The delays in the recovery we are seeing now are a very short-term thing.”

Moreover, he insists that for all the investment pouring into renewable energy, the global economy remains highly dependent on oil – and that this will continue to be the case for at least the next decade.

Indeed, in its Global Energy Perspective 2021:

With the oil price likely to continue experiencing near-term turbulence, Graham-Wood believes one of the best ways to gain exposure to that longer-term trend is through the US oil majors.

So far, the big US producers have remained far more committed to a future in oil and gas than their European counterparts, which have announced strategic shifts towards renewables in their future investments.

For investors, argues Graham-Wood, that marks a clear parting of the ways. “If you wanted to invest in oil majors before, you would bunch them all together,” he says.