Oil markets retained strength over the past week despite many bearish factors influencing the global economy.
COVID-19 cases spiked in Europe leading to new lockdown measures in France and the UK. The 2nd wave of COVID cases also spread to other European countries including Switzerland, Belgium, Italy are tightening measures to contain a 2ndoutbreak of the pandemic. The number of affected countries grow quickly as governments fail to implement strict measures.
Yet, oil markets have remained somewhat optimistic as OPEC+ signalled that it could extend output cuts through 2021. Last week, the OPEC technical committee (JTC) already discussed the slowing global oil demand recovery. In telephone calls between the Crown Prince of Saudi Arabia and the Russian President, the need for sustained OPEC+ cooperation was emphasized by both leaders. Markets, in the meantime, priced in the possibility of an OPEC+ extension of current cuts in 2021, which we had anticipated in our previous report last week.
Brent crude closed at $42.93 up by 0.19% w/w, while WTI closed at $40.88, up by 0.68% w/w. Prices recorded their highest levels at $43.4 (Brent) and $41.29 (WTI) last Thursday, supported by a large draw in US crude oil inventories and oil products.
The OPEC+ JMMC meeting on Monday discussed compliance and emphasised the need for even stronger compliance. The meeting's final communique did not provide any clarity about whether the group will ease output cuts in January 2021. Yet, the group had highlighted demand growth concerns and the need to take proactive measures.
Earlier statements from Russia's and the UAE's energy ministers on the OPEC agreement raised uncertainty about the future of the current output cut deal.
Next to this, the rebound in the US oil rig count, which rose for a 4th consecutive week, may further complicate the discussion on an output cut extension. Currently US oil rigs stand at 205 rigs, up by 12 w/w. Libya's rising oil production which currently stands at 500,000 bpd may add further pressure on the markets if global demand fails to recover. Related: Biden's $2 Trillion Energy Plan Could Crush Natural Gas
The IEA has published its World Energy Outlook which seems to provide a more realistic forecast on the future of oil demand under different COVID-19 scenarios. The IEA predicts jet fuel demand won’t fully recover before 2023, while oil demand is projected to grow to 103 million bpd by 2030. This figure is very close to our projections published last week, in which we estimated growth in oil demand to be around 102.5 million bpd by 2030.
Stronger compliance will be essential for market stability
OPEC seems to be taking analyst expectations seriously; rising Libyan oil production and the prospect of slowing demand will impact OPEC's decision to ease or not to ease output cuts in 2021. Compliance in the meantime will be a major topic on the OPEC+ agenda until their its meeting. Data from OPEC secondary sources show that compliance in September was 105% for OPEC and 97% for non-OPEC leading to a total compliance of 102%, slightly higher than the previous month. Aggregate overproduction for the group stands at 2.33 million bpd between May – September. Russia has not submitted its compensation plan for overproducing 430,000 bpd between May – September, and it's not clear when it is going do so. Countries have until October 26th to submit their compensation pledges. On the other hand, positive messages have come from the Russian side, which highlighted during the JMMC meeting the slowdown in demand growth and decline in oil sector investment by 20% due to the COVID-19 pandemic. This positive message may have already put Saudi Arabia and Russia on the same page when it comes to market uncertainty.
Strong figures on US transport fuel demand
Another factor that may influence OPEC's decision is the continued decline of commercial oil stocks, which the EIA reported last week. Last week, the EIA reported a decline in crude oil inventories by 3.8 million bpd to stand at 489.1 million barrels, only 54.3 million barrels above its level a year ago. Gasoline and middle distillates also saw major declines by 1.2 million barrels and 7.2 million barrels respectively, reflecting a strong recovery in transport fuel demand. Net imports stand at 3.15 million bpd, up by 77,000 bpd w/w.
US oil production is down by 500,000 bpd w/w to stand at 10.5 million bpd, despite a rebound in oil activity. The apparent oil demand stands at 16.73 million bpd, up by 302,000 bpd w/w. These figures are severely impacted by hurricane Beta which took its toll on Gulf of Mexico oil production.
In the meantime, we believe OPEC+ will wait and watch how the demand picture will look until their next meeting in November before making a recommendation on the production policy for 2021.
By Yousef Alshammari for Oilprice.com
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And while the pandemic is casting some dark clouds over the global economy and global oil demand, countries of the world are far more experienced and abler and also better equipped and supplied with medications to cope with a second wave of the pandemic than they were at the start of the pandemic particularly with the anticipation that effective anti-COVID vaccines will soon be available. That is why the global oil market is showing more resilience.
Furthermore, the market is still underpinned by two very powerful bullish influences. One is China’s rebound which has been the wonder of the world in terms of its crude oil imports and its economic growth.
The other is the messy state of the US shale oil industry. A US shale oil production comeback to pre-pandemic levels is very much in doubt. According to my calculations, US oil production (overwhelmingly shale oil) has declined to an estimated 6.63 million barrels a day (mbd) so far this year comprised of 2.19 mbd of shale oil and 4.44 mbd of conventional oil. And yet, the US Energy Information Administration (EIA) has grudgingly so far admitted to a loss of only 3 mbd releasing the information by drips and drops.
One thing OPEC+ is to guard against is the temptation and the wishes of some of its members and non-OPEC members to ease the production cuts prematurely by 2 mbd from the current 7.99 mbd to 5.99 mbd starting January 2021. It should keep its cohesion particularly with Saudi Arabia and Russia readying from the same hymn sheet and members refraining from giving conflicting messages to the market.
OPEC+ should never be rushed into easing the cuts until the pandemic starts to ease significantly or until effective anti-COVID vaccines become available. Furthermore, easing the cuts is easy but reinstating them would be far more difficult than before.
Libya's rising oil production to 500,000 b/d shouldn’t worry OPEC+ yet. Domestic consumption is estimated currently at 230,000 b/d leaving only 270,000 b/d for export. OPEC+ should start to worry when Libya’s production exceeds 1 mbd.
Dr Mamdouh G Salameh
International Oil Economist
Visiting Professor of Energy Economics at ESCP Europe Business School, London