- China’s imports of crude oil are set to jump 10% this year, but the import surge occurred during the downturn earlier this year when crude prices collapsed. In fact, China’s exports of refined products are on the rise.
- China’s oil demand dipped slightly by 30,000 bpd in October, but the IEA expects China’s demand to be up 480,000 bpd in the fourth quarter from a year earlier, dramatically better than OECD countries.
- Despite Covid-19 vaccine optimism, a huge buildup of global oil inventories also remains. As a result, there is some risk to the price rally going too far in the short run. OECD stockpiles were 11% higher in September than they were in the same month a year earlier.
- Looking forward, the IEA is more optimistic heading into the New Year. “We expect a solid recovery in demand from the lows reached in 2020 due to the Covid-19 pandemic. Oil demand will recover nearly two-thirds of the amount lost in 2020, rising by 5.7 mb/d year-on-year,” the agency said.
2. Oil supply losses from the Big 3
- Global oil supply averaged 92.7 mb/d in November, the highest monthly total since May, but still down 9.2 mb/d from a year ago.
- Expected supply increases in the fourth quarter will come entirely from OPEC+, and the group will also account for 80% of the expected production increases in the first quarter of 2021, according to the IEA.
-…
1. China’s oil import surge ended
- China’s imports of crude oil are set to jump 10% this year, but the import surge occurred during the downturn earlier this year when crude prices collapsed. In fact, China’s exports of refined products are on the rise.
- China’s oil demand dipped slightly by 30,000 bpd in October, but the IEA expects China’s demand to be up 480,000 bpd in the fourth quarter from a year earlier, dramatically better than OECD countries.
- Despite Covid-19 vaccine optimism, a huge buildup of global oil inventories also remains. As a result, there is some risk to the price rally going too far in the short run. OECD stockpiles were 11% higher in September than they were in the same month a year earlier.
- Looking forward, the IEA is more optimistic heading into the New Year. “We expect a solid recovery in demand from the lows reached in 2020 due to the Covid-19 pandemic. Oil demand will recover nearly two-thirds of the amount lost in 2020, rising by 5.7 mb/d year-on-year,” the agency said.
2. Oil supply losses from the Big 3
- Global oil supply averaged 92.7 mb/d in November, the highest monthly total since May, but still down 9.2 mb/d from a year ago.
- Expected supply increases in the fourth quarter will come entirely from OPEC+, and the group will also account for 80% of the expected production increases in the first quarter of 2021, according to the IEA.
- Saudi Arabia and Russia are expected to add 460,000 bpd back onto the market in the fourth quarter, plus another 480,000 bpd in the first quarter.
- The U.S. is not expected to see output rebound, having stabilized at lower levels. American oil producers are expected to shed 80,000 bpd in the fourth quarter, and 70,000 bpd in the first quarter of next year.
3. OPEC+ revenues have collapsed
- Saudi oil export revenues are down 45% on average since the production cuts came into force in May. Russian revenues are down 55% and Nigeria’s are down by 50%. Iraq and the UAE have seen revenues fall by 40%.
- In an effort to head off a corresponding collapse in economic activity, Saudi Arabia has decided to run large budget deficits. It will cut spending by 7.3%, but the Saudi government will dip into sovereign wealth funds, spending hundreds of billions of riyals in the coming years.
- “We still believe we are not out of the woods yet and we wanted to make sure we had enough financing for the health service and make sure we are prepared for a wave two, God forbid, to hit Saudi Arabia,” Finance Minister Mohammed Al-Jadaan told Bloomberg.
- Saudi Arabia’s budget deficit was 10.6% of GDP this year.
4. Long-term oil demand forecasts cut sharply
- There are differing opinions among investors about the long-term outlook for the oil market. If many projections about permanent demand destruction stemming from the pandemic are correct, the oil sector has lost its luster, perhaps permanently.
- However, other investors see the hit, while historic, as temporary. If that view wins out, now is the time to buy.
- The oil majors themselves differ. ExxonMobil (NYSE: XOM) says demand will increase for the foreseeable future. BP (NYSE: BP) says demand already peaked. As the Wall Street Journal notes, “neither strategy is popular among investors.” Both oil majors have been losers this year and have also underperformed in recent years.
- Goldman Sachs predicts that overall CAPEX in the renewables sector in 2021 will outpace oil and gas for the first time ever.
- Investors are demanding stricter terms for oil and gas. The minimum rate of return required to finance long-term oil and gas projects is 20%, compared to just 3% for renewables, according to Goldman. That is, investors will only give the green light on oil and gas projects if they are really attractive, due to a variety of financial, regulatory, technological, and other policy risks.
5. U.S. LNG export surge as market tightens
- Global LNG markets have staged a dramatic rebound in recent weeks, as demand for LNG soars in Asia.
- U.S. LNG exports in November reached 9.4 billion cubic feet per day, a record high. LNG export terminals in the U.S. were operated at 93% of their capacity.
- JKM prices – prices for LNG cargoes delivered in East Asia – have spiked, with spot prices soaring over $12/MMBtu, up from under $2/MMBtu earlier this year.
- Part of the price spike can also be attributed to supply outages in Australia, Malaysia, Qatar, Norway, Nigeria, and Trinidad and Tobago.
- “We caution that the recent spike in prompt JKM to above $12/mmBtu seems too much too soon, not sustainable as Asia LNG supplies increase in the coming weeks,” Goldman Sachs wrote in a note to clients.
- Still, the bank said that the general tightness in the market is here to stay for a few years, and that the bearishness from mid-2020 is over.
6. Bakken production erodes further
- The Bakken was hit hard during the pandemic-related shutdowns in March-April, bearing the brunt of the supply shut-ins.
- After a few months, the supply came back, but not to pre-pandemic levels.
- The quick return was followed by several months of weak figures, and production is now eroding as the lack of drilling activity gets overwhelmed by steep decline rates.
- The EIA projects that the Bakken loses 23,000 bpd of supply in January. The rig count is also expected to remain at relatively low levels, even as it rebounds in places like the Permian. There are less than a dozen rigs in the Bakken, down from over 50 at the start of the year.
- North Dakota’s oil regulator says his state likely won’t see any supply growth until the second half of 2022.
7. ExxonMobil upgraded to Buy by Goldman Sachs
- The oil majors have taken a beating this year. The most recent development came from ExxonMobil (NYSE: XOM), which announced CAPEX cuts and an expected write-down of $17-$20 billion.
- But Goldman Sachs says the selloff has gone far enough, and the bank upgraded its rating to Buy for the five western oil majors – ExxonMobil (NYSE: XOM), Chevron (NYSE: CVX), Total (NYSE: TOT), Royal Dutch Shell (NYSE: RDS.A) and BP (NYSE: BP). The bank is also bullish on Canadian oil sands and major refiners.
- “In this group, we have skewed most negative on ExxonMobil for multiple years given concerns about capital intensity,” Goldman analysts said in a note. “However, given sharp YTD underperformance, particularly versus Chevron and Total, we believe valuations better reflect some of these risks.”
- Overall, the majors offer an “attractive combination” of balance sheet strength, income, leverage to crude price and demand recovery, underweight positioning, and lower cash flow breakevens, the bank said.
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