Oil Market Report - November 2020

• Weak historical data and the resurgence of Covid-19 in Europe and the United States led us to revise down our near-term global demand outlook by 0.4 mb/d in 3Q20, 1.2 mb/d in 4Q20 and 0.7 mb/d in 1Q21. We now expect demand to decrease by 8.8 mb/d in 2020 (versus 8.4 mb/d in last month’s Report) and to rise by 5.8 mb/d in 2021 (versus 5.5 mb/d last month). Vaccines are unlikely to significantly boost demand until well into next year.
• Global oil supply rose by 0.2 mb/d m-o-m to 91.2 mb/d in October. Production from countries participating in the OPEC+ agreement held largely steady. Overall compliance was 103%. In November, world oil supply may rise by over 1 mb/d as the US recovers from hurricanes and Libya continues to bounce back. Output from producers outside of OPEC+ is set to fall by 1.3 mb/d in 2020 and rise by 0.2 mb/d next year. US supply falls by 600 kb/d in 2020 and by 655 kb/d in 2021.
• Global refining throughput fell in September as US hurricane shutdowns were not fully offset by higher activity elsewhere. Permanent shutdowns of refinery capacity now amount to 1.7 mb/d, but there remains significant structural overcapacity with more than 20 mb/d of crude distillation capacity idle. In October, the modest fall in crude prices and tighter product markets contributed to generally stronger cracks, except for gasoline.
• OECD industry stocks fell for the second consecutive month by 19.7 mb (0.66 mb/d) in September to 3 192 mb, and were 225 mb above their five-year average. OECD industry crude stocks are only 51 mb below their peak in May. In 3Q20, observed global stocks fell by 0.8 mb/d. Preliminary data for October show crude stocks falling 8.4 mb in the US, 8.3 mb in Europe and 1.2 mb in Japan. In October, volumes of crude oil held in floating storage decreased by 17.8 mb to 156.3 mb.
• Despite October being volatile, ICE Brent futures fell only $0.35/bbl versus September to $41.52/bbl. The contango deepened slightly, but forward curves fell below $50.00/bbl for ICE Brent through mid-2028. North Sea Dated discounts to futures widened in October, emphasising the supply overhang. Freight rates continued to fall for crude tankers, paralleling the fall in activity. News of a potential Covid-19 vaccine saw Brent futures climb above $45/bbl earlier this week.

• Weak historical data and the resurgence of Covid-19 in Europe and the United States led us to revise down our near-term global demand outlook by 0.4 mb/d in 3Q20, 1.2 mb/d in 4Q20 and 0.7 mb/d in 1Q21. We now expect demand to decrease by 8.8 mb/d in 2020 (versus 8.4 mb/d in last month’s Report) and to rise by 5.8 mb/d in 2021 (versus 5.5 mb/d last month). Vaccines are unlikely to significantly boost demand until well into next year.
• Global oil supply rose by 0.2 mb/d m-o-m to 91.2 mb/d in October. Production from countries participating in the OPEC+ agreement held largely steady. Overall compliance was 103%. In November, world oil supply may rise by over 1 mb/d as the US recovers from hurricanes and Libya continues to bounce back. Output from producers outside of OPEC+ is set to fall by 1.3 mb/d in 2020 and rise by 0.2 mb/d next year. US supply falls by 600 kb/d in 2020 and by 655 kb/d in 2021.
• Global refining throughput fell in September as US hurricane shutdowns were not fully offset by higher activity elsewhere. Permanent shutdowns of refinery capacity now amount to 1.7 mb/d, but there remains significant structural overcapacity with more than 20 mb/d of crude distillation capacity idle. In October, the modest fall in crude prices and tighter product markets contributed to generally stronger cracks, except for gasoline.
• OECD industry stocks fell for the second consecutive month by 19.7 mb (0.66 mb/d) in September to 3 192 mb, and were 225 mb above their five-year average. OECD industry crude stocks are only 51 mb below their peak in May. In 3Q20, observed global stocks fell by 0.8 mb/d. Preliminary data for October show crude stocks falling 8.4 mb in the US, 8.3 mb in Europe and 1.2 mb in Japan. In October, volumes of crude oil held in floating storage decreased by 17.8 mb to 156.3 mb.
• Despite October being volatile, ICE Brent futures fell only $0.35/bbl versus September to $41.52/bbl. The contango deepened slightly, but forward curves fell below $50.00/bbl for ICE Brent through mid-2028. North Sea Dated discounts to futures widened in October, emphasising the supply overhang. Freight rates continued to fall for crude tankers, paralleling the fall in activity. News of a potential Covid-19 vaccine saw Brent futures climb above $45/bbl earlier this week.

As we publish this Report there is considerable excitement at news that an effective vaccine against Covid-19 might soon be available. Oil prices initially surged and just ahead of publishing this Report the Brent front month futures price bounced back to over $45/bbl, a level not seen since the beginning of September. However, it is far too early to know how and when vaccines will allow normal life to resume. For now, our forecasts do not anticipate a significant impact in the first half of 2021.

In the here and now we continue to see surging caseloads, particularly in Europe and the United States. The recent announcements of lockdowns and other containment measures in many countries have led us to significantly lower our estimates for global oil demand. Revised data for the third quarter of 2020 have reduced demand by 0.4 mb/d. Early data and our estimates for the fourth quarter, also impacted by a mild start to the northern hemisphere winter heating season, have cut demand by 1.2 mb/d versus last month’s Report. The lingering impact of the pandemic is likely to reduce demand by 0.7 mb/d in the first quarter of 2021.

Nearly all of these massive reductions are found in OECD countries. For the non-OECD world, we have actually raised our demand estimates mainly due to improved expectations in China and India. In 2020, global oil demand will be 91.3 mb/d, which is 8.8 mb/d lower than in 2019 and below the average level for 2013. In 2021, demand will recover by 5.8 mb/d to 97.1 mb/d, about 3 mb/d below the pre-Covid level in 2019.

In the short term, the poor outlook for demand and rising production in some countries; for example Libya (production has increased to 1 mb/d from only 0.1 mb/d in August), Iraq and the United States (recovering from hurricane disruptions), suggest that the current fundamentals are too weak to offer firm support to prices. Physical crude prices remain below futures and this is a signal that markets are well supplied. Observed oil stocks fell by only 0.8 mb/d in the third quarter against an implied draw of 2.1 mb/d. Lack of data transparency for some non-OECD countries partly explains the gap. We can see that OECD crude stocks in September are only 51 million barrels (4%) below their high point in May. Product stocks, following six consecutive months of builds, finally fell in September.

With a Covid-19 vaccine unlikely to ride to the rescue of the global oil market for some time, the combination of weaker demand and rising oil supply provides a difficult backdrop to the meeting of OPEC+ countries due to take place on 1 December. Our current balances, incorporating the quota increase of 2 mb/d included in the OPEC+ supply agreement, imply almost zero stock change in the first quarter of 2021. Unless the fundamentals change, the task of re-balancing the market will make slow progress.

As we publish this Report there is considerable excitement at news that an effective vaccine against Covid-19 might soon be available. Oil prices initially surged and just ahead of publishing this Report the Brent front month futures price bounced back to over $45/bbl, a level not seen since the beginning of September. However, it is far too early to know how and when vaccines will allow normal life to resume. For now, our forecasts do not anticipate a significant impact in the first half of 2021.

In the here and now we continue to see surging caseloads, particularly in Europe and the United States. The recent announcements of lockdowns and other containment measures in many countries have led us to significantly lower our estimates for global oil demand. Revised data for the third quarter of 2020 have reduced demand by 0.4 mb/d. Early data and our estimates for the fourth quarter, also impacted by a mild start to the northern hemisphere winter heating season, have cut demand by 1.2 mb/d versus last month’s Report. The lingering impact of the pandemic is likely to reduce demand by 0.7 mb/d in the first quarter of 2021.

Nearly all of these massive reductions are found in OECD countries. For the non-OECD world, we have actually raised our demand estimates mainly due to improved expectations in China and India. In 2020, global oil demand will be 91.3 mb/d, which is 8.8 mb/d lower than in 2019 and below the average level for 2013. In 2021, demand will recover by 5.8 mb/d to 97.1 mb/d, about 3 mb/d below the pre-Covid level in 2019.

In the short term, the poor outlook for demand and rising production in some countries; for example Libya (production has increased to 1 mb/d from only 0.1 mb/d in August), Iraq and the United States (recovering from hurricane disruptions), suggest that the current fundamentals are too weak to offer firm support to prices. Physical crude prices remain below futures and this is a signal that markets are well supplied. Observed oil stocks fell by only 0.8 mb/d in the third quarter against an implied draw of 2.1 mb/d. Lack of data transparency for some non-OECD countries partly explains the gap. We can see that OECD crude stocks in September are only 51 million barrels (4%) below their high point in May. Product stocks, following six consecutive months of builds, finally fell in September.

With a Covid-19 vaccine unlikely to ride to the rescue of the global oil market for some time, the combination of weaker demand and rising oil supply provides a difficult backdrop to the meeting of OPEC+ countries due to take place on 1 December. Our current balances, incorporating the quota increase of 2 mb/d included in the OPEC+ supply agreement, imply almost zero stock change in the first quarter of 2021. Unless the fundamentals change, the task of re-balancing the market will make slow progress.