While global gas prices have surged driven by a myriad of events, the knock-on effects of gas crunch may lead to an even tighter physical oil market, and a transitory price spike above $85 per barrel (/b) in the fourth quarter (Q4) of 2021 cannot be ruled out, a report said.
Global gas prices have been hit factors such as LNG supply outages; steep declines in European gas production; below average renewable power output; and lower-than-expected Russian exports to Western Europe, said the Mitsubishi UFJ Financial Group, a Japanese bank holding and financial services company, in its latest “Oil Market Weekly”.
With Europe heading into winter with well-below gas inventory levels, markets are progressively fixated on both the magnitude of imported gas/LNG to the continent and how much oil can replace gas in the months ahead.
“For an oil markets perspective, we estimate that the conceivable capacity for gas-to-oil switching at 1.9 million barrels per day (mbd) across Europe, Asia and the Middle East. Should only a fraction of this potential switching occur this winter – in tandem with rising demand for heating oil – then this could result in a global oil demand surge of between 1-2 mbd for 3-6 months,” MUFG said in the report.
“In extremis, a severe tightening in global gas supplies presents a unique and acute bullish impulse for oil as a widening deficit depletes inventories with markets struggling to find a balance.”
Oil price forecasts
The balancing of cyclical demand headwinds with structural supply tailwinds, leads us to remain neutral-to-bearish on oil prices going into the final quarter of 2021 – notwithstanding bullish impulses stemming from spillovers of the gas markets crisis into oil.
Brent is expected to regress lower from $75/b in the second quarter (Q2) of the year to end Q3 and Q4 2021 at $73/b and $64/b, respectively, and to average $58/b in 2022, the report said.
“Under the weight of higher Opec+ output, steadily rising shale, the eventual return of Iranian supply, juxtaposed with a more normalised demand profile, we lean short oil further out along the curve,” the report said.
