Oil Market Recovery under Pressure
After achieving month-on-month gains in every month between May and August, the Brent price shed some of these gains in September and October. While the main risks facing the oil market are still being dominated by demand factors, the risks on the supply side have also been on the rise. On the demand side, the recovery of oil demand has been slower than expected back in May and June, while global oil demand is now expected to take longer to reach its pre-crisis level. The pace of oil demand recovery has also been highly uneven both in terms of geography and fuels. In terms of geography, Asian demand remains robust led by China and India but in Europe where the reimposition of restrictions is already having its toll particularly on gasoline and jet fuel demand, demand seems to have stalled. In terms of fuels, jet fuel remains the weakest link by far, with diesel consumption impacted by the economic contractions, although rising trucking and freight is offering some respite. This unevenness in demand is causing refineries, particularly in Europe, massive headaches and alongside the ability to ramp up refinery runs and large product stocks it will continue to keep refining margins under pressure.
The downside risks from the supply side have also been on the rise. To start with, there has been the return of Libyan barrels to the market. Libya’s crude production is now expected to rise above 1 mb/d by year end. The Alberta government has announced that it will stop setting monthly oil production limits for producers by December 2020 allowing producers to use available pipeline capacity. Also, there is a belief that with Biden now winning the election, the US will return to the Joint Comprehensive Plan of Action (JCPOA) fairly quickly and this implies around 1.2-1.5 million b/d could hit the market as soon as 2021. This scenario is being increasingly incorporated into the 2021 and 2022 balances.
As the OPEC+ meeting approaches, the Group finds itself in an uncertain and harsh environment with the balance of risks tilted to the downside. In addition to the size of the cut and the high compliance, another key feature of the OPEC+ deal is that the agreement extends all the way to end of April 2022. This gives OPEC+ the potential to ‘tweak’ the deal to changing demand conditions and the potential 3 return of disrupted supplies. This requires a proactive and flexible approach and keeping compliance high under the different scenarios.