Crude Oil ready to crack the $100 level – BMO

Crude oil’s remarkable recovery continues. With WTI piercing US$70/bbl, the chatter of $100 oil has picked up steam. Moreover, the surge in prices should make things easier for OPEC+ at its Ministerial Meeting on July 1, when it will decide on its production cut strategy from August onwards, Art Woo, Senior Economist and Director Economics at the Bank of Montreal, reports.

The magical $60 number – critical to catalyze new incremental production – has likely risen

“Beyond higher-than-expected prices, we think another key development that is working in OPEC+’s favour is the fact that the recovery in US crude oil production has remained muted to date.” 

“We wonder if OPEC+ would be truly comfortable letting crude oil prices run significantly higher despite the obvious economic benefits of greater export dollars and fiscal revenues. Indeed, crude oil prices, if sustained, have already reached levels that would push many key OPEC+ members’ budgets back into surplus.”

“Letting oil hit $100 or $90, particularly on a sustained basis, would also surely increase the viability of some U.S. production shut in last year. Moreover, there is the risk that higher prices could fast-forward the move to renewable energies (i.e., electric vehicles). As a result, there is a possibility that OPEC+ could begin to unwind its production cuts a little more aggressively despite a potential return of Iranian production.”

“We are revising up our forecasts for WTI to average US$65/bbl in 2021 and $70 in 2022 (previously $60 for both years) due largely to OPEC+’s ability to restrain supply and rebalance the global oil market. This is not to say prices cannot head higher, especially given the tendency of commodities to overshoot, but we think such an event will prove to be temporary.”