Short-term Oil Market Outlook
Following the sharp price recovery in May/June which saw daily Brent rebounding above $40/b in June 5 from $19/b in April 21, before holding remarkably steady in the $40/b and $45/b in the course of July/August, September saw prices breaking on the downside of this range and trading below $40/b for the first time since June for few days. This was due to a combination of bearish factors both on the demand and the supply side. Concerns about the second wave of the coronavirus pandemic have led many to revise their demand forecasts downwards. Furthermore, China’s crude imports which have been a key equilibrium mechanism began to ease. On top of all this, there is much talk about peak oil demand with some suggesting that oil demand has already peaked. On the supply side, OPEC+ started easing their cuts and shut-in non-OPEC production in North America started making its way back to the market in response to higher prices. UAE undercompliance in August/September raised concerns over OPEC+ producers maintaining their high compliance levels. But despite the bearish headwinds, the $40/b oil price floor held firm in September and so far in October, and Brent remains well supported at the mid $40/b-$45/b range.
This presentation explores the key factors shaping the outlook for market fundamentals and oil prices ahead. The oil demand recovery has shifted into a lower gear and is highly uneven in terms of geography and different parts of the barrel and this unevenness will continue to shape prices and refining margins. Most importantly, there is wide recognition that the recovery of oil demand to its pre-crisis levels will take longer than many originally expected. But the wide uncertainty surrounding demand implies that the role of the supply side in supporting the oil price becomes even more important. High OPEC+ compliance has been a key feature in the current cycle and compliance will remain key throughout the entire duration of the agreement. Another unique feature has been the compensation mechanism and regardless if laggard producers compensate for their overproduction, the compensation scheme has an important signaling role. The effectiveness of the OPEC+ response however will be shaped by demand factors and the extent and pace of the global economic and oil demand recovery. Outside OPEC+, US shale is a key factor shaping non-OPEC supply but as in the case of oil demand, US shale recovery is also entering a slow and lengthy phase, due to the unprecedented fall in drilling activity, barriers to external finance and cash flow pressures. Putting these different moving parts into our model, the short-term price outlook sees the oil recovery persisting though the demand/supply risks to the outlook remain tilted to the downside.