Is the oil price worth $50 a barrel?

• Will oil prices average $50 a barrel in 2021?
• Investors remain concerned by oversupply and Covid-19
• US shale and rise of renewables could see oil prices struggle

According to the US Energy Information Administration (EIA), global oil prices are expected to average at $43 a barrel throughout the second half of this year, with that figure expected to rise to $50 in 2021.

But will oil price forecasts be realised or could the commodity fall short of expectations considering the myriad of headwinds financial markets face over the next 14 months?

Oil prices struggle amid weak demand and oversupply concerns

Oil prices were trading at around $61 a barrel at the start of the year, only for prices to crash in March as lockdowns eroded energy demand and markets panicked to make sense of the coronavirus pandemic, with futures contracts closing at -$37 a barrel in April amid the turmoil.

Thanks to production cuts by OPEC, oil prices began to stabilise in June, averaging $43 a barrel throughout the month, with the commodity trading sideways throughout the summer, despite ongoing fears about a second wave of Covid-19 cases and oversupply concerns.

Brent crude looked like it would fall below $44 a barrel in early morning trading on Thursday, though it was able to rebound as the day went on to trade at $44.72 (-1.43%) at the time of publication.

The US West Texas Intermediate followed a similar trajectory, briefly slipping below $42 a barrel, only for the benchmark to recoup some of its losses later in the session to trade at $42.46 (-1.12%).

US shale and renewables transition diminishes OPEC influence

The increase in US shale production and companies transitioning to renewables amid a weak price outlook for oil has the potential to weaken the political and economic clout of OPEC.

With its power potentially diminishing it could lead the oil cartel to behave erratically destabilising oil markets further in the process and potentially driving down the commodity’s value.

If this scenario plays out it could exacerbate tensions in the Middle East, with Saudi Arabia keen to maintain higher oil prices as it relies on the commodity as the primary source of income as it lacks a diversified economy.

It could also weigh on oil prices and see crude fall short of analysts’ $50 average target for 2021.

Brent crude: technical analysis

Brent crude has been on the slide since Wednesday’s peak, with a decline in risk assets hitting energy prices, according to Josh Mahony, senior market analyst at IG.

‘That move has taken us into a very deep retracement, with an ascending trendline in play here,’ he added. ‘With that in mind, another move higher looks likely, with a bullish outlook in play unless we see a break below the $45.18 level.’

How to trade commodities with IG

Looking to trade Brent crude and other commodities? Open a live or demo account with IG and buy (long) or sell (short) shares using derivatives like CFDs in a few easy steps:

1. Create an IG trading account or log in to your existing account
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3. Choose your position size
4. Click on ‘buy’ or ‘sell’ in the deal ticket
5. Confirm the trade