Oil and Gas

Why I’m Raising My Price Forecast on Crude Oil

We’re rapidly approaching an inflection point.

Since December 14, 2020, more than 109 million doses of the COVID-19 vaccines have been administered. That means roughly 21% of the U.S. population has received at least one dose of a vaccine.

And by May 1, the White House is looking to have vaccine appointments available to anyone who wants them.

The long nightmare of the pandemic is winding to a close. A return to “normal” is already underway.

And that’s triggered a surge in one of the worst-performing sectors in 2021… but it’s a comeback we knew would happen.

Now, the question is how high can it go?

Three Months and a 30%-Plus Return

There were a lot of remarkable moments in the market in 2020.

We saw the fastest 30% sell-off in market history.

That was followed by the fastest bear-to-bull-market recovery on record. And for the first time ever, crude oil prices imploded and fell into negative territory.

With planes, trains and even the majority of cars parked as businesses across the world were shuttered, there was very little need for oil. And though U.S. crude prices recovered from those seemingly impossible lows, they hung around $30 to $40 per barrel for much of 2020.

Those were levels we hadn’t seen since the global crude market collapse in 2015 and 2016, when the Organization of Petroleum Exporting Countries and its 10 crude-producing allies (OPEC+) flooded the world with crude in an attempt to bankrupt U.S. producers.

But I saw a rebound coming into this year, in large part thanks to the vaccine.

To kick off 2021, I stated that I expected U.S. crude to retake $60 per barrel – a level not seen since the early days of 2020.

I didn’t (and still don’t) believe pre-pandemic energy consumption will return this year. But I thought crude could return to this price because there was a perfect opportunity for a multiyear rally in energy – albeit a bumpy one – as some normalcy returned.

Well, it didn’t take long for that prediction to become a reality.

U.S. Crude Price

Year to date, U.S. crude has gained more than 30% and is trading above $65!

On top of the vaccine rollout, crude’s price received an extra boost from dramatic freezing weather that gripped much of the country, which shut down refineries in areas not used to the cold.

But the real driver is that the world is recovering.

And we’re starting to see welcomed signs of this.

Congestion is returning to New York. This month, it’ll see the fastest toll-route-traffic increase since November 2019.

And we have the summer driving season on the horizon! It’ll be busier than last year’s, that’s for sure.

Travel bans are being lifted across the country, and vaccinations should be available for everyone just in time for summer vacations and the Fourth of July holiday weekend.

That means demand for crude will skyrocket – and its price along with it. But how high will it leap?

$100 Crude? Yes!

Over the past decade, U.S. crude oil production has been on a pronounced incline higher… that is, until the pandemic hit.

U.S. Crude Performance

Thanks to the prolific shale plays found across the country, the U.S. became the largest oil producer in the world – unseating Russia and Saudi Arabia.

In February 2020, the U.S. produced more than 13.1 million barrels per day (bpd) of crude. But by August 2020, this output had collapsed 26% to 9.7 million bpd. That’s the lowest level of production since 2017.

We have seen a slight recovery here. Today, U.S. crude production is around 11 million bpd. And that’s about what the U.S. Energy Information Administration expects the country to average in 2021, with an uptick of 12 million bpd in 2022.

At the same time, OPEC+ has agreed to keep its 7.2 million bpd in place. Now, if these nations were to decide to limit production further, it would push worldwide supply into a deeper deficit than it is already in.

For now, global consumption of crude is forecast to be 97.5 million bpd this year. But production will fall short of that at 97.1 million bpd.

That will continue to put upward pressure on global crude prices. Though, if OPEC+ decides to tighten the reins, crude prices could launch skyward.

In fact, Goldman Sachs (NYSE: GS) now forecasts Brent crude – the international benchmark – will hit $75 per barrel by the third quarter.

And Piper Sandler is projecting Brent crude will top $100 per barrel by the year’s end.

The spread between U.S. crude and Brent is slim. So that paints a very bullish case for oil for the remainder of the year.

I must also raise my own forecast for U.S. crude to more than $75 for this year.

From our current vantage point, it looks like the bounce back is going to be swifter than expected. On top of that, U.S. production is at a multiyear low.

But here’s the other major sticking point: There are only 402 working oil rigs in the U.S. That’s a 49% drop from a year ago. And only 309 of them are drilling for crude.

That means as demand gains speed, U.S. producers will be in a race to increase production. And any time there’s a deficit between supply and demand, it results in an extremely bullish case.

So even though U.S. crude has rocketed higher already in 2021, it looks like there’s still plenty of upside ahead. And investors aren’t too late to ride this sector higher.

Here’s to high returns,

Matthew