Increased global demand, together with recent supply cuts, could spark a more than 20% rally in oil prices this year, experts say.
“We expect prices to peak at $65 and remain in the range $55 to $65,” says Art Hogan, chief market strategist at National Securities Corp. in New York.Futures contracts for light sweet crude were recently fetching $53 a barrel on the Commodities Mercantile Exchange.
Traders wanting to profit from the potential rally should consider buying June-dated futures contracts for light sweet crude on the CME. Alternatively, they could try purchasing the Invesco DB Oil exchange-traded fund (ticker: DBO), which holds a basket of crude oil futures. The fund has gained 7.5% this year through Jan. 11. It lost 21% in 2020, according to Morningstar.
This year crude has already rallied about 9%, due in part to an unexpectedly bullish move by OPEC+ (the Organization of the Petroleum Exporting Countries plus Russia) earlier this month.
The world’s second-largest producer, Saudi Arabia, surprised the world by announcing it would cut production in February and March by one million barrels a day (bpd). That move more than offset a combined 75,000 bpd increase for the same period by Russia and Kazakhstan.
Overall, the OPEC+ cut should help put a floor under prices, especially given that the member states will probably stick to their quotas. “We don’t see material risk to the group’s [OPEC’s] cohesion,” Barclays said in a recent report. Historically, OPEC members have often failed to stick to their production quotas, making price stability an issue.
Meanwhile, demand from China is higher than pre-pandemic levels. In the third and fourth quarters of 2020, the country consumed 13.7 million and 14 million bpd, respectively. That compares to an average of 13.3 million in 2019, according to OPEC.
Traders will likely bet on a rebound in demand for the rest of the world as Covid-19 vaccines allow people to return to business as usual. “My sense is that as we get back to a more normal society, we get a massive surge in people wanting to go flying and do things they could do before the pandemic,” says Jon Rigby, an oil analyst at UBS London. Such a scenario would mean an increase in oil demand, with air and land travel resulting in higher fuel consumption.
Oil prices will get an additional boost from a softer dollar. “My general view is that we won’t have a stronger dollar,” says Steve Hanke, professor of applied economics at Johns Hopkins University. “Automatically, a little bit weaker dollar will add a little bit of strength to the oil price.” Oil gets priced in dollars, which means that in general, when the dollar weakens, crude prices tend to rally.
A price rally will likely be tempered by increasing supply from shale producers in North America, says Hogan of National Securities. While the Biden administration will likely reduce drilling on federal lands, there is still a lot of potential supply ready to tap when crude prices approach $60. “There is plenty for us in the next two years to increase our supply with hydraulic fracking,” he says.
Buying any commodity futures contract is a risky endeavour, and oil futures are no exception. The price of crude is subject to influences by national governments, geopolitical upheaval, and changes in the global economy. All these can result in significant price volatility.
Despite that, the odds looked stacked in favour of a rally in crude prices over the next few months. “We see prices going higher, if not meaningfully higher,” says Daryl Jones, director of research at Hedgeye Risk Management.
Following the devastation of recent flooding, experts are urging government intervention to drive the cessation of building in areas at risk.
New research from Knight Frank’s International Waterfront Index shows waterfront properties are costing more than double their inland counterparts in Sydney while in Melbourne waterside properties attract a 40% premium.
Australia’s coastline attracts some of the highest waterfront premiums in the world with Sydney topping the index — an average premium of 121% — compared to an equivalent home set away from the water.
Auckland ranked second on the list of 17 international locations — a premium of 76%. The list saw Gold Coast (71%), Perth (69%) and the Cap d’Antibes (59%) on the French Riviera round out the top 5.
Australia continued to feature prominently in the research with Brisbane’s waterfront premium coming in at 55%, with Melbourne also in the top 10 at 39%.
According to Knight Frank Australia’s head of residential research, Michelle Ciesielski, there has always been strong appetite for Sydney’s waterfront homes.
Australia’s luxury residential market has advanced, it lacks the depth of prestige markets in more established global cities said Cieselski.
“As a result, our Australian cities can achieve a significantly higher premium on the waterfront compared to a similar property inland without access to, or a view of, water,” she said.
“Also, Australia is known for its balmy outdoor lifestyle, so many buyers in this super-prime space are willing to pay a premium to secure the ideal position along the waterfront.”
The data also suggests that beachfront homes were most desirable, commanding a premium of 63% compared to harbour locations fetching 62% premium and coastal homes with a 40% premium.