Oil prices corrected some of the weekly gains today, but levels remain strong on overall market euphoria.
Here is Rystad Energy’s daily market comment from our Head of Oil Markets Bjornar Tonhaugen, with some extra content on what to expect in 2021:
Oil prices may be losing some of their gains on Friday but that’s nothing unusual after a strong bullish rally. Overall it has been another good week for oil, which seems able to go into the Christmas week with yet another coat of weekly gains.
The last days have led Brent to nearly 52 dollars per barrel, an extravagant rise taken the current environment and it is only normal that the market wants to correct itself when it went too far.
Yet the correction is not wide, and despite some trimming oil prices are very healthy under the circumstances.
Market euphoria has not stopped really, as more vaccine news are anticipated in coming weeks, more approvals, wider campaign rollouts and these are all music to the traders’ ears.
Although we believe the market has gotten a bit carried away, our balances from 2Q next year do support higher prices. But getting through 1Q21 first will not be without hiccups.
Vaccine roll-outs in the US and elsewhere do not immediately allow governments to open up economies and borders. In the short-term, we expect mobility restrictions in the US and Europe introduced in 4Q20 to mostly spill over into 1Q21, for which we expect oil demand to average 93.6 million bpd.
Our RealTime data still shows signs of improvement in daily road and aviation fuels demand, but in the US, for example, road fuels demand is still 13% below pre-virus levels.
A swift and successful kickoff of vaccinations in 1H20 could bring yearly 2021 yearly oil demand to 95.8 million bpd.
Regional oil demand growth will be led by Asia, and overall we expect a gradual increase in demand across sectors – even a sufficiently vaccinated society will not immediately begin driving to work again or suddenly want to travel abroad.
Aviation will be the most vaccination-dependent sector: we do not expect jet fuel demand recovery to accelerate until the 50% vaccination threshold is reached
But once 2Q21 rolls around, we see room for OPEC+ to open the taps even wider and still manage to keep the market in a slight deficit.
This leaves the 23-nation supply alliance in a coveted position to guide the market, and potentially less likely to insist on the not-so-compliant likes of Russia and Iraq to pay back for past overproduction misdeeds.
The primary goal of OPEC+ will be to chip away at the massive implied storage builds.
We forecast global crude storage levels to start ramping down significantly by Jun-21, bringing down the global storage glut – which peaked at more than 850 million barrels in May-20 – down to about 180 million barrels by Dec-21.
Refineries should be able to lend OPEC+ a helping hand. Crude throughput had an abysmal year at 74 million bpd in 2020, and we anticipate runs to recover to 79.3 million bpd in 2021, but the recovery won’t be shared equally – Asian and Middle Eastern refiners are expect to achieve run rates on par with pre-virus levels by 2021, thanks to new capacity additions, whereas Europe and US refineries will still lag behind.
Non-OPEC+, non-US supply will also make a hearty comeback in 2021: we expect production to grow by 600,000 bpd compared to 2019 levels, propelled by major projects like Norway’s Johan Sverdrup, and Brazil, one of the few countries to see positive oil growth in 2020.
We warn about downside versus the futures curve for 1Q21 but keep our view intact for a rising crude price trend from 2Q21 through 2022, followed by a downcycle in 2023-24 as demand growth slows down after the Covid-recovery.
The vaccinations are proverbially here, but that doesn’t mean traders should throw up their hands and go long and hard on oil prices – with OPEC+ now meeting every month, we still expect bouts of volatility into the year.
Read the latest issue of the OGV Energy magazine HERE.
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