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Crude Oil v C-19
It is just 15 months since US West Texas Intermediate traded at -$40.32/ bbl due to C-19 restrictions and a lack of storage capacity at Cushing, Oklahoma where the WTI contract is settled in physical form.
The collapse into negative territory was unprecedented and led to an investor stampede out of the oil sector. All sorts of dire predictions circulated about C-19 accelerating oil’s demise. But that was then.
Over 2020, into Q1 2021 crude supply and demand forces re-aligned, helped by the Russia/ Saudi price war ceasefire and 1m bbls/ day Saudi production cut on 5th January 2021. OPEC+ did finally adjust its expectations and then its output to the realities of C-19. Oil demand dropped by 8.6m bbls/day over 2020.
Recent US crude data is encouraging, refineries are back to 92.9% capacity (2019; 94.2%). Crude stocks at Cushing fell 1.5m bbls to 40.3m whilst excluding the Strategic Petroleum Reserve commercial crude inventories were 452.3m bbls to June 25, only 3.4% lower than the comparable 2019 level.
Global oil demand has risen to 97m bbls/day up 5.4m bbls/day this year. According to the IEA consumption of crude should exceed 100m bbls/day by the end of 2022 assuming the rebound in global GDP growth post C-19 continues and the continued roll-out of vaccination programmes.
A key factor is the crude recovery (+48% YTD) has taken place with only partial re-opening so far. Public and private road travel and seaborne trade has recovered, but aviation and the cruise sector has badly lagged.
Representing around 10% of global oil demand, the aviation business demand is expected by industry sources to be back to 2019 levels only by 2023. Whilst tourism should recover faster, this will be back to normal only by summer 2022. At the G7 meeting a new transatlantic travel taskforce was set up to explore ways to re-open UK-US travel with a rule relaxation only expected at the end of summer 2021 which means summer 2021 is lost. We are hopeful for Q4 2021 for a substantial normalization which could provide a further push to crude oil.
According to the US Energy Information Administration, global oil inventories have been drawing down since Q3 2020.
The forecasts suggest that oil demand is returning to its pre-C-19 annual 0.8m to 1.5m barrels/ day growth rate. This growth trajectory is expected to hold until the middle of the decade. According to McKinsey forecasts oil will resume its 1% growth rate with a possible peak only in 2029.
Rising oil consumption would dent environmental hopes that were elevated in 2020. Notably that 2019 would mark ‘Peak Oil’ and crude oil demand would be trending lower into the mid 2020s. A more gradual plateauing for most of the 2020s now looks more possible than it did in 2020.
Oil producers, particularly Saudi Arabia, want to harvest the strong global economy in 2021. Saudi Arabia needs to counter its loss of US market share via dominating Asia supply. It needs to retain OPEC+ leadership.
The US achieved self-sufficiency in ‘net petroleum trade’ in September 2019. Its position as the world’s largest producer of liquid fuels and natural gas leave it in an enviable position v rest of the world. It leaves the US less dependent on the Gulf/ OPEC sources.
The Biden Administration is unlikely to interfere with the functioning of global markets via trade threats, tariffs, sanctions, unilateral withdrawal from global treaties etc. The implication is the oil market could be less subjected to sharp ‘geopolitical’ swings as it was over 2016-2020.
As OPEC’s leaders quibble over production levels with plans to add 2m bbls/ day over H2 it appears that crude oil is underpinned for the remainder of 2021. Demand is rapidly catching up on 2019 levels, C-19 has not damaged underlying demand for crude oil.
We concur the outlook for crude oil is relatively bullish with US$80/ bbl short term certainly possible. We do not think a return to Q1 2021 $50-$60 range is likely.
i) Oil demand is normalizing with 2019 demand levels being revisited in 2022 due to strong Asia rebound
ii) Trend annual oil demand growth (+0.5%/ +1%) appears intact
iii) Global crude oil inventories are declining (c. 2m bbls/ day)
iv) Oil price volatility has smoothed with decline in standard deviation
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