Where Does Wall Street Think Oil Is Heading?


After a volatile week of reversals and re-reversals, oil prices have rebounded a bit again on Wednesday thanks to an overall risk-on theme returning to the markets after the Senate passed the crucial $1 trillion infrastructure spending bill.

September WTI crude (CL1:COM) closed +2.7% to $68.29/bbl, while October Brent (CO1:COM) settled +2.3% to $70.63/bbl.

The biggest challenge for oil markets has been the fast-spreading Covid-19 Delta variant hurting confidence about a global economic recovery, with market participants watching the rapidly swelling infection figures with considerable alarm. Even more worrying are new developments in China, the world’s biggest crude importer and once the world’s Covid-19 epicenter, after Beijing imposed new lockdowns in at least 144 of the worst-hit areas nationwide in a bid to stop the spread. Beijing has opted to employ its tried-and-tested method of targeted lockdown that has been successful in stopping at least 30 Covid-19 flare-ups in the past.

Adding to the pressure on the oil bulls are reports that the Biden administration is worried about high oil prices and wants OPEC+ to increase production in order to lower prices for consumers. According to the report, U.S. officials spoke this week with representatives from several OPEC members, including Saudi Arabia and the United Arab Emirates.

The Biden administration is reportedly saying the July OPEC+ agreement to gradually ease production cuts  into next year is not enough during a “critical moment in the global recovery.

Bullish: some analysts are saying that the worst could be in the rearview mirror, and oil prices could have established a new floor.

When the July WTI contract managed to close Monday above the July low at $66.41/bbl, it marked that level as a “line in the sand for the oil market.”If support holds, which it likely will as long as the news flow regarding COVID does not continue to materially deteriorate, then WTI will remain range-bound between aforementioned support at $66 and resistance from July at $75 a barrel,” Tom Essaye of the Sevens Report has told MarketWatch.

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As with every other sector, there’s a pretty big dichotomy in Wall Street regarding the oil price outlook, with both strongly bullish and strongly bearish views.

The good news: Wall Street remains largely bullish about the oil price trajectory.

Here are different oil price outlooks by a cross-section of Wall Street experts.

The Bulls:

UBS

Treasury yields have climbed sharply over the past year, with the 10-year note going from 0.675% to 1.356% currently. Indeed, Treasury yields are now matching the overall S&P 500 (NYSEARCA:SPY) dividend yield.

UBS maintains a pro-cyclical bias, expecting rates to climb further. With a strong tilt to recovery, UBS says it favors Energy (NYSEARCA:XLE), Consumer Discretionary (NYSEARCA:XLY), Financials (NYSEARCA:XLF) and Industrials (NYSEARCA:XLI).

Overall, our outlook for growth in the economy and corporate profits remains unchanged and our fixed income team expects interest rates to reverse course and for the 10-year Treasury yield to rise toward 2% by the end of the year. We therefore view the recent underperformance of cyclical segments as temporary.” 

Bank of America

Back in June, a Bank of America analyst made waves after predicting that oil prices could be headed to $100.

BofA commodities strategist Francisco Blanch said he sees a case for $100 a barrel oil in 2022 as the world begins facing an oil supply crunch:

First, there is plenty of pent up mobility demand after an 18 month lockdown. Second, mass transit will lag, boosting private car usage for a prolonged period of time. Third, pre-pandemic studies show more remote work could result in more miles driven, as work-from-home turns into work-from-car. On the supply side, we expect government policy pressure in the U.S. and around the world to curb capex over coming quarters to meet Paris goals. Secondly, investors have become more vocal against energy sector spending for both financial and ESG reasons. Third, judicial pressures are rising to limit carbon dioxide emissions. In short, demand is poised to bounce back and supply may not fully keep up, placing OPEC in control of the oil market in 2022,” explained Blanch.

Blanch’s bullish prediction is so far the boldest by mainstream Wall Street banks.

Goldman Sachs

Two months ago, U.S. investment bank Goldman Sachs predicted that Brent would reach $80 a barrel in the summer.

Well, that was before the Delta variant started running riot everywhere.

Goldman Sachs has now lowered its forecast after the latest pandemic trends, but still expects Brent crude oil to average $75 a barrel in the third quarter.

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Regarding the worrying trend of rising inflation, Goldman Sachs shares the Fed’s view that the price pressures are largely transitory and should subside in the coming months. However, should high inflation persist beyond six months, Goldman says companies with pricing power are likely to do well. Sectors that have historically done well in high-inflation environments are Energy, Real Estate (NYSEARCA:XLRE), Health Care (NYSEARCA:XLV) and Consumer Staples (NYSEARCA:XLP).

The Bears: 

Morgan Stanley

A few days ago, Morgan Stanley went full bear on the energy sector, saying it prefers the Utilities sector due to the latter’s superior defensive qualities.

“With our more defensive tilt and the risk reward skews outlined above, we’re changing our order of preference between Utilities and Energy,” Morgan Stanley says.

MS raised Utilities to Equal Weight from Underweight and downgraded Energy to Underweight from Equal Weight.

Over the past week, XLU was one the best-performing sectors after climbing 4.9% while Energy was lower among the cyclicals, up a mere 0.2%.

Nevertheless, MS says it “maintain a positive bias given strong free cash flow projections, but given our more cautious view on risk assets, the limited house upside forecast for oil, the importance of rate of change in oil price to sector performance, our revisions breadth analysis above, and a worsening technical picture for Energy equities, our top down preference skews more negative pending a price reset.

So, MS might not be so bearish after all.

Here’s a rundown of the latest brokerage forecasts for 2021 average prices per barrel for Brent and WTI:

Brokerage/Agency Brent/WTI Date Revised

Barclays $69.00/$67.00 July 22

Goldman Sachs Commodities Research $72.70/$69.80 July 20

Credit Suisse $70.00/$67.00 July 18

ABN Amro $66.00/$63.00 June 23

Citi Research $72.00/$64.00 June 22

BofA Global Research $68.00/$65.00 June 20

Societe Generale $64.00 — June 8

Commerzbank $65.00 $62.00 May 6

Barclays $66.00/$62.00 March 23

BofA Global Research $63.00 $60.00 March 15

Societe Generale $65.60 – March 9

Goldman Sachs Equity Research $72.61/$69.75 March 5

Commerzbank $62.00/$59.00 March 5

Goldman Sachs Commodities Research $72.70/$69.80 March 5

ABN Amro $63.00/$60.00 March 5

JP Morgan $67.00/$65.00 March 4

ING Economics $65.00 – March 4

UBS* $75.00 – March 4

Goldman Sachs Commodities Research $68.90/$66.00 +March 1

Barclays $62.00/$58.00 Feb. 25

BofA Global Research $60.00/$57.00 Feb. 22

UBS* $68.00/$65.00 Feb. 16

ABN Amro $55.00/$51.00 Feb. 12

Barclays $55.00/$52.00 Jan. 25

ANZ $57.90/$55.30 Jan. 15

Citi Research $59.00 – Jan. 8

Standard Chartered $51.00/$49.00 Jan. 6

UBS* $63.00/$60.00 Jan. 6

* indicates end-of-period forecast

+ Denotes forecast as of March 1, and not revision date.

By Alex Kimani for Oilprice.com

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