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An oil pump jack operating south of Los Angeles.
Frederic J. Brown/AFP via Getty Images
Oil prices could spike above $100 a barrel next year if demand trends keep improving, Bank of America analyst Francisco Blanch wrote in a report on Monday.
The report gives more credence to a target price that has enticed some traders, but has received relatively little backup from Wall Street analysts so far. Brent crude, the international benchmark, rose 1.9%, to $74.90 a barrel, on Monday, its highest level since October 2018.
Oil has risen above $100 several times in the past two decades, but the chances of that happening again had seemed to diminish as dynamics changed in the industry. U.S. shale drilling became so productive in the middle of the last decade that it appeared that supply would always stay high enough to keep prices down, regardless of what OPEC and other oil-producing countries did. And electric cars will almost certainly cause oil demand to fall. But the past year has turned those assumptions on their head.
Covid-19 caused fuel prices to plunge and forced producers to slow drilling. What happened next has been surprising, though. Instead of resuming their old ways when fuel demand picked up again, most producers held back to conserve cash and keep their balance sheets lean. U.S. oil production is nearly 12% below its peak levels, and few analysts expect it to come all the way back in the next couple of years. OPEC has also restrained drilling. That means that fuel demand is jumping, but supply still hasn’t caught up. Already, oil that had been placed in storage during the Covid lockdowns has been pumped out and used, and oil inventories are below their historic levels in developed countries.
Blanch doesn’t expect oil to hold above $100 a barrel, but it could get there briefly next year. Bank of America’s price target for Brent is $68 this year and $75 in 2022. He expects three main factors to drive the price increases.
“First, there is plenty of pent up mobility demand after an 18-month lockdown,” he wrote. “Second, mass transit will lag, boosting private car usage for a prolonged period of time. Third, prepandemic studies show more remote work could result in more miles driven, as work-from-home turns into work-from-car.”
Bank of America analyst Doug Leggate adjusted his ratings on oil stocks in light of the new price targets. He now rates none of them at Sell after upgrading
Marathon Oil
(ticker: MRO) to Neutral.
Leggate downgraded two gas-focused producers —
CNX Resources
(CNX) and
Range Resources
(RRC)–to Underperform, given his preference for oil-focused names.
His favorite names are
Exxon Mobil
(XOM),
Occidental Petroleum
(OXY),
Hess
(HES),
Diamondback Energy
(FANG), and
Devon Energy
(DVN).
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