May 15, 2020 / 7:29 AM / 21 days ago

Barclays raises oil price outlook as falling output offsets demand hit

(Reuters) - Barclays Commodities Research on Friday raised its oil price forecasts for this year and 2021, buoyed by supply cuts to balance the demand erosion caused by conrovirus-led restrictions.

FILE PHOTO: Drilling rigs are seen at an oil well operated by Venezuela's state oil company PDVSA, at the oil rich Orinoco belt, near Morichal at the state of Monagas April 16, 2015. REUTERS/Carlos Garcia Rawlins/File Photo

In recent days, several OPEC nations including Saudi Arabia said they will cut output more than originally pledged. Producers in the United States and Canada have cut production by 1.7 million bpd, much faster than expected.

The bank upgraded its forecasts for Brent crude and U.S. West Texas Intermediate futures by $5-6 per barrel for 2020 and $16 per barrel for 2021.

“Market forces have aligned producers around the world to support fundamentals, and demand is increasingly showing signs of having troughed,” it said in a note.

But it added that the sheer size and speed of the disruption and associated inventory overhang is likely to take time to get fully absorbed.

U.S. crude prices plummeted to as much as minus $40 a barrel last month because of storage problems at the Cushing, Oklahoma storage hub.

Over the very short term, prices are likely to remain under pressure as uncertainties around the speed of economic recovery remain significantly high, Barclays said.

Global benchmark prices are expected to average $28 in Q2 before rising to $39 in the last quarter. U.S. crude is forecast at $21 this quarter and rise to $36 by Q4.

“Despite all the voluntary output adjustments in response to the plummet in demand, we expect a large market imbalance in Q2 20, partly due to a phase lag in supply response, but a recovery in demand still holds the key to rebalancing.”

Oil prices rose on Friday after data showed demand for crude picking up in China, boosting hopes that the global supply overhang may start to fade. Brent was trading at $32.40 per barrel and WTI at $28.52 a barrel. [O/R]

Barclays now sees Brent prices averaging $37 a barrel and WTI at $33 this year. For 2021, the bank expects Brent and WTI prices to average $53 and $50 per barrel, respectively.

As fuel demand continues to recover, Cushing’s demand and supply dynamics are unlikely to deteriorate materially, despite a potential recovery of some shut-in production over the coming weeks, the bank said, adding that it does not expect WTI prices to go into negative territory again.

Reporting by Swati Verma in Bengaluru; Editing by Rashmi Aich

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