Oil Demand Revised Down Once Again

1. Oil rallies on vaccine hopes

- The oil bulls returned this week on the extraordinary news that a potential coronavirus vaccine is not only effective but could be widely available by the second quarter of 2021.

- WTI surged 9% in just a few hours and seesawed the rest of the week, but now looks steady above $40 per barrel.

- The rally was accentuated by the fact that investors have recently sold off oil, trading out of bullish positions. “The excessive investor skepticism, and their previous unbridled optimism, are often good counter-indicators,” Commerzbank wrote in a note. The bank added that there is “little in the way of fundamental factors to support any more pronounced upswing.”

- Gold reacted in the opposite way to vaccine news, plunging by around 5% shortly after the announcement. “The main explanation for this is that further stimulus measures will be less necessary if an effective vaccine becomes available,” Commerzbank said.

- The flip side is that U.S. covid cases are surging rapidly and it will take time to deploy the vaccine. Potential Washington gridlock could put even more pressure on monetary easing, a bullish factor for gold waiting in the wings.

2. Oil demand revised down on a COVID surge

- A vaccine holds out hope, but in the interim, demand has been disappointing. The IEA cut its third-quarter oil demand forecast by 0.4 mb/d this week.

- Worse, the agency cut its fourth-quarter demand by 1.2 mb/d relative to last month’s forecast. The IEA sees demand down by 0.7 mb/d in the first quarter of 2021.

- The downward revisions are highly concentrated in OECD countries, where second and third waves are out of control. Demand is actually on the rise in non-OECD countries.

- Mobility has declined in recent weeks across Europe, where new lockdowns have been put in place. But mobility is down in the U.S. as well, despite no national restrictions and only minor restrictions at the state level.

- “There is no question therefore that OPEC and its allies (OPEC+) will need to do something quickly to prevent any renewed price slide,” Commerzbank said this week.

3. Biden’s plans for federal lands

- President-elect Joe Biden likely won’t have a friendly Senate to work with, all but ending hopes of a major green stimulus.

- That leaves executive authority to pursue energy and environmental goals. One of the pledges that the oil and gas industry is watching closely is his proposed plan to limit or curtail access to federal lands for drilling.

- The federal government owns large swathes of the American West, but the bulk of unconventional drilling occurs on private lands in North Dakota, Texas, Oklahoma, and Colorado.

- Only the southeastern corner of New Mexico would be highly affected by federal land restrictions.

- Goldman Sachs laid a scenario, arguing that the macro case is bullish – with the potential for a vaccine, rebounding demand, lower investment in supply, and oversold equities all working towards a positive outlook for E&P stock prices.

- However, stocks with federal lands exposure include Devon Energy (NYSE: DVN), EOG Resources (NYSE: EOG), Cimarex Energy (NYSE: XEC), WPX Energy (NYSE: WPX), and to a lesser extent ConocoPhillips (NYSE: COP) and Occidental (NYSE: OXY).

4. Platinum metals still have upside

- Supply problems for platinum group metals (PGMs) create some bullish pressure for the market, which has recently been overshadowed by gold.

- Anglo American Platinum (AMS: JSE) cut its refined production guidance by 2.5Moz from 3.1-3.3Moz last week after closing gits Anglo Converter Plant, according to Standard Chartered.

- “We had been factoring in a supply recovery in Q4-2020 given the in-process inventory and health and safety protocols that had been implemented around COVID-19, but the supply loss tightens the market for all three PGMs,” Standard Chartered wrote in a note.

- However, coronavirus-related lockdowns have crimped demand. PGMs are used in cars and trucks, and car sales have taken a hit in Europe, although they are up 10% year-on-year in China.

- “We estimate that the supply losses and demand weakness deepen the palladium deficit towards 300koz, swing platinum to modestly undersupplied (c.50koz), and keep rhodium undersupplied by around 70koz in 2020,” the bank said.

5. Flurry of M&A activity

- A sharp decline in the value of drilling acreage has helped accelerate the latest round of M&A in the U.S. oil industry. Average acreage prices fell 70% between 2018 and 2020, falling from $17,000/acre to $5,000/acre, according to Rystad Energy.

- In the second half of 2020, M&A activity hit a record high, with deals worth $22.5 billion in October alone.

- Not only are large companies taking over smaller ones, but there have also been “mergers of equals,” Rystad said.

- “Overall, we expect this trend to continue across the shale industry over the next two years as a large number of producers with challenging cash flow balance view consolidation as the best exit opportunity,” Rystad said.

6. Non-OPEC supply losses will persist

- Oil supply from outside of OPEC+ declined by 170,000 bpd in October.

- For 2020 on the whole, non-OPEC+ supply is expected to decline by 1.3 mb/d on average, and only rebound slightly by 480,000 bpd in 2021. Spending cuts and low prices take their toll, according to the IEA.

- The U.S. and Canada will account for the bulk of those losses. U.S. production at 10.6 mb/d is down by 2.1 mb/d from the same month a year ago, but should only be down by about 0.9 mb/d for the full-year in 2020 compared to 2019.

- U.S. output could fall by another 0.5 mb/d next year as depletion takes hold.

- Canada is expected to lose 340,000 bpd this year but rebound by 300,000 in 2021.

7. Weak margins continue to put pressure on refiners

- In the third quarter, refiners underproduced relative to demand, “helping to ease some of the product stock overhang built up in the first half of the year,” the IEA said in a report.

- Inventories could continue to draw down in the fourth quarter, even as refining runs tick up by about 1.6 mb/d, quarter-on-quarter.

- “Still, global product markets will exit this year with almost 1 mb/d of implied product stock build due to oversupply in the first half of the year,” the agency said.

- However, the outlooks between Asia and the Atlantic basin are diverging sharply. “East of Suez…the recovery has been essentially uninterrupted, with September runs estimate already above February levels.” Asia, in other words, is back to pre-pandemic levels.

- “By contrast, Atlantic Basin refining runs will remain at their lowest levels for two decades,” the IEA said.

- About a dozen refinery closures have been announced over the past few months, totaling around 1.7 mb/d of capacity.