Where Next for Oil Markets?

Oil and gas prices have been soaring this year amid surging demand and tight supplies. Morningstar analysts look at where they think crude prices and production go next

Dave Meats, CFA 7 October, 2021 | 12:03PM
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Oil rig at sunset

Last month, we sounded the alarm about the potential for oversupply and lower prices due to robust private operator US production growth. This month, we've changed course and now expect tight supply and high prices into 2022. In this case, the changing fact is the continued underperformance of OPEC+ production compared with its stated targets, which combined with an on-track demand recovery will lead to inventory draws the remainder of the year and require additional US production in 2022 to balance the market. But for this to happen, prices will need to remain high. Prices could remain high into 2023 as well if Iran volumes do not return as we expect, requiring even more US volume growth. Markets have already begun to recognise the tightening supply, sending oil prices and energy equities higher, but some opportunity remains.

The delta wave of Covid-19 has been on the downslope globally since early September. Supply chain issues may have pulled down consensus global GDP estimates down slightly for 2021, but the impact to oil demand is marginal as long as driving and flying continue to recover. Meanwhile, oil use for power generation is growing in the face of high natural gas prices, providing incremental demand. As a result, there's no change to our outlook for global crude demand. We currently project global consumption to reach 96.2 mmb/d and 100.4 mmb/d, respectively, in 2021 and 2022. The latter estimate exceeds the prepandemic consumption level of 100.2 mmb/d (2019).

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Dave Meats, CFA  David Meats, CFA, is a senior equity analyst for Morningstar.