After having a year to forget in 2020, the energy sector has this year emerged as the best-performing of all 11 U.S. market sectors. Energy Select Sector SPDR ETF (NYSEARCA:XLE) is up 46.2% in the year-to-date, making the broader market S&P 500’s 12% gain appear pedestrian. Oil prices appear to have stabilized in the upper 60s with WTI price finding support around $65 per barrel while Brent is seeing support around $67 per barrel.

The sector has a successful Covid-19 vaccination rollout and gradual recovery of the global economy to thank for the resurgence, with several countries including the US and much of Europe having reopened their economies. But even more important is OPEC’s continuing production discipline with the organization sticking to earlier plans to only gradually increase production in its latest meeting. Analysts widely expect OPEC+ to reaffirm at its meeting next Tuesday plans to unwind the cuts by 840,000 barrels per day (bpd) from July 1, signaling confidence that the market is well-positioned to absorb the additional supply as demand is rising with economies reopening. Russia estimates that the global oil market is currently in a deficit of around 1 million bpd, Deputy Prime Minister Alexander Novak said on Wednesday.

Yet another positive catalyst: Private job growth for May rose at its fastest clip in nearly a year as companies hired 970K workers, ADP has reported, with the U.S. government saying first-time claims for unemployment benefits last week dropped below 400K for the first time since the early days of the pandemic.

Wall Street continues to be largely bullish on the oil sector, with some analysts saying that $80 per barrel in the summer is now in the crosshairs.

John Kilduff of Again Capital has predicted Brent to hit $80 a barrel and WTI to trade between $75 and $80 in the summer, thanks to robust gasoline demand. Brent is currently trading at $71.63 per barrel, while WTI is changing hands at $69.13.

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Unleaded gasoline was selling at $3.04 per gallon on average Wednesday, more than 50% higher than a year ago, according to AAA.

"Demand is ramping up very quickly because everybody's driving, and we have the reopening of Europe, which is really starting to happen, while India seems to have hit an inflection point, in terms of cases, which in my mind could mean you also get a return of mobility," Francisco Blanch, global commodities and derivatives strategist at Bank of America, has told CNBC.

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Blanch is even more sanguine about the long-term oil trajectory and sees prices hitting $100 per barrel over the next two years.

"We think in the next three years we could see $100 barrels again, and we stand by that. That would be a 2022, 2023 story. Part of it is the fact we have OPEC kind of holding all the cards, and the market is not particularly price responsive on the supply side and there is a lot of pent-up demand … We also have a lot of inflation everywhere. Oil has been lagging the rise in prices across the economy," Blanch has said.

Gas

Source: Y-Charts

Shale comeback

Some experts have, however, sounded the alarm saying that high oil prices might not be sustainable over the long term.

Daniel Yergin, vice chairman of IHS Markit, has warned that high oil prices might not be sustainable over the long term mainly due to political interference.

"There's an incredible case where the oil price could get to $80, but there would be a reaction to that. That would start to affect demand, and also there would be a political reaction to that. You'll start to see phone calls being made. [President Joe] Biden has been in politics long enough to know that high gasoline prices are always a problem for whoever is president. That's true even in eras of energy transitions."

An even bigger risk: A comeback by U.S. shale could muddy the waters for everyone.

The U.S. industry is producing about 11 million barrels a day, down from about 13 million before the pandemic. Many analysts, however, are not sure how fast U.S. shale will make a full comeback.

According to an analysis by the authoritative Oxford Institute for Energy Studies, rising oil prices could allow for a significant return of U.S. shale to the market in 2022, potentially upsetting the delicate rebalancing of the global oil market.

“As we enter 2022, the US shale response becomes a major source of uncertainty amid an uneven recovery across shale plays and players alike. As in previous cycles, US shale will remain a key factor shaping market outcomes,” Institute Director Bassam Fattouh and analyst Andreas Economou have said.

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The institute lays out several possible scenarios with some that could lead to an oil surplus.

During its latest meeting, OPEC+ said it expects global oil demand to increase by 6 million barrels a day during the second half of the year. It said it saw stocks at about 70 million barrels below the average for the whole of 2021, a more optimistic outlook than its previous forecast of 20 million barrels below the average. But the Oxford analysts say that an expected increase in shale output by 0.95 million barrels per day could be easily absorbed by the market unless the global recovery hits a major snag.

However, Fattouh and Economou have warned that the market could flip into a surplus by the fourth quarter of 2022 if the U.S. shale growth hits the upper bound of 1.22 million barrels per day and global demand recovery turns out to be slower than expected.

In other words, even a partial recovery by U.S. shale might be enough to offset the delicate balance that OPEC+ has so far managed to establish in the markets.

However, we think it will take at least two years before U.S. shale makes a significant comeback. Right now most shale companies are reluctant to invest, preferring to pay down debt and hike dividends. Investors have been taking a dim view of companies that have continued aggressive drilling campaigns, and that sentiment is unlikely to change any time soon.

Alex Kimani for Oilprice.com

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