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Oil prices have jumped up by around 20% since the beginning of the year. Economists at Capital Economics still expect the release of ‘pent-up’ demand at a time of constrained global supply to deepen the market deficit and increase oil prices in the near-future, but recent developments – particularly on the supply side – have convinced them to revise down oil mid-year price forecasts.

Higher OPEC+ production to limit oil price gains

“OPEC+ production now looks set to rise faster than we had anticipated in the coming months, although it will remain below pre-virus levels. OPEC+ announced that output quotas would increase by 350,000 bpd in May and June, and by 440,000 bpd in July. Beyond July, we think that high prevailing prices will incentivise further rises in OPEC+ production.”

“It seems likely that Iran’s production (which is not subject to OPEC+ production quotas) will grow over the coming months too. The 25-year cooperation agreement between Iran and China, officially signed at the end of March, provides Iran with a large guaranteed market for its oil. What’s more, if the 2015 nuclear accord is revived by the US and other world powers, it would pave the way for sanctions to be lifted and for production to return to pre-sanction levels.”

“We expect global oil demand to be markedly higher this year compared to last year. We are revising up our forecast of US consumption as the rapid easing of lockdowns and fiscal stimulus are likely to boost transport activity. However, in the near-term, strong US demand growth will be partly offset at the global level by our downward revision to consumption in the EU and parts of the developing world, owing to the re-imposition of virus-related travel restrictions.”

“We still expect oil prices (Brent) to peak at $75 per barrel in Q3 ($80 previously) on the back of a rebound in global demand. However, steady increases in OPEC+ production will start to clear the market deficit and we still expect prices to fall to $70 by end-2021 and $60 by end-2022.”