What we expect from oil prices

-- | 19/01/2021

Page 1 of 1

David Meats: Widespread lockdowns are still depressing global crude consumption. A second wave of infections is still buffeting much of the Northern Hemisphere, especially Europe and the US, triggering more lockdowns and travel restrictions. But the market sees light at the end of the tunnel. A spate of successful vaccine trials followed by regulatory approvals and initial inoculations in some countries has sent stocks roaring higher.

Rystad Energy now expects 10.8 billion vaccine doses by the end of 2021, and in most developed countries, it thinks the vulnerable groups, the elderly and others at high risk, can be fully protected by March 2021. Beating the virus will enable governments to reopen borders and relax restrictions on gatherings and mobility, paving the way for near-complete recovery in crude demand.

But oil producers are not ready for the recovery yet. Without further investment, the current glut could become a shortage in late 2021 or 2022. OPEC-plus recently shied away from its original plan to bring back 2 million barrels per day of supply in January this year, and by late December, US shale firms had only reactivated about 90 rigs after mothballing more than 400 during the pandemic. The shale industry is attempting to shed its reputation for profligacy, and as a result, firms are allocating capital extremely cautiously. But collectively, they must bring back about 300 more rigs during 2021 just to maintain a comfortable supply deficit and prevent inventories from drawing down too quickly and perhaps collapsing below normal levels after the recent success.

So, higher crude prices are needed. Our midcycle forecast is still US$55 a barrel for WTI crude, and if that isn't enough of an incentive, we wouldn't rule out prices rising even higher in the short run. Higher prices bode well for energy stocks. The sector has dramatically outperformed the broader market since the Pfizer announcement on November 9, but the recent rally has not closed the gap with our valuations. Stocks still look cheap across all subsectors, especially oilfield services and refining. In those groups, our top picks are Schlumberger (SLB) and Valero (VLO), respectively.

This report appeared on www.morningstar.com.au 2022 Morningstar Australasia Pty Limited

© 2022 Morningstar, Inc. All rights reserved. Neither Morningstar, its affiliates, nor the content providers guarantee the data or content contained herein to be accurate, complete or timely nor will they have any liability for its use or distribution. This information is to be used for personal, non-commercial purposes only. No reproduction is permitted without the prior written content of Morningstar. Any general advice or 'class service' have been prepared by Morningstar Australasia Pty Ltd (ABN: 95 090 665 544, AFSL: 240892), or its Authorised Representatives, and/or Morningstar Research Ltd, subsidiaries of Morningstar, Inc, without reference to your objectives, financial situation or needs. Please refer to our Financial Services Guide (FSG) for more information at www.morningstar.com.au/s/fsg.pdf. Our publications, ratings and products should be viewed as an additional investment resource, not as your sole source of information. Past performance does not necessarily indicate a financial product's future performance. To obtain advice tailored to your situation, contact a licensed financial adviser. Some material is copyright and published under licence from ASX Operations Pty Ltd ACN 004 523 782 ("ASXO"). The article is current as at date of publication.