Market Overview

Oil prices have risen significantly since the beginning of November, when the North Sea Brent benchmark traded below $37.5 per barrel. By noon in Europe on Wednesday, November 11, the quotes even exceeded $45 per barrel, as a vibrant response to widespread hopes for Pfizer's anti-COVID vaccine to come and save the world demand for fuel soon. Despite the fact that other fragments of fundamental reality are less stable, and it could remain so at least for several months. , It seems that some investors in the markets may still keep in mind the potential technical target zone of $46 or even higher, especially as oil contracts were originally not in a hurry to move to the present lower levels immediately in sync with the downward correction of the U.S. stock markets, which clearly happened during the course of the this week. Thus, prices slid down to the $42.5 area last night after official U.S. inventories data by the Energy Information Administration (EIA) yesterday showed a 4.28 million barrel of surplus in sharp contrast with an almost 8 million barrel decline a week before. 

This data diverged from both the average expectations of the Bloomberg analytical poll for the decline of the reading at around 910,000 barrels, and, moreover, from the measurements made by the American Petroleum Institute (API) which assessed a possible decrease of volumes in petroleum storage reservoirs at more than 5 million barrels, according to the fresh API report on Tuesday. However, even the additional EIA data signalled one more reduction in distillates stocks by 5.3 million barrels, which means a decline for eight consecutive weeks, also gasoline stocks have been dropping over the last week.

Meanwhile, the Organisation of Petroleum Exporting Countries (OPEC) and allies, or the so-called OPEC+ informal club, continue to discuss whether it makes sense to postpone when the easing of restrictions on oil production will begin,  which may be designed for one or two quarters of 2021. This was reported on Wednesday by Bloomberg, citing sources among the delegations of a number of cartel countries. According to them, OPEC+ members are currently negotiating the idea of maintaining the current quotas for oil production until the first months of next year. The proposal for more significant production cuts has not yet won broad support, the same agency's sources said. The updated OPEC+ production cut agreement has been in effect since May. The first stage of the deal, when the alliance countries reduced production by as much as 9.7 million barrels per day (bpd), ended in August. From September to the end of this year, the reduction is said to be 7.7 million bpd. From January 1, the restrictions are planned to be reduced to 5.8 million bpd. The whole agreement is valid until April 2022, and its terms may be revised in December 2021. A final decision on quotas for Q1, 2021 is expected to be made at the OPEC+ meeting on November 30.

However, even a possible increase in oil production by OPEC+ cartel by 1.9 million bpd starting in January may not affect the total level of reserves, according to the view shared by experts of the International Energy Agency. Their current calculations assume almost zero change in inventory levels during the first quarter of 2021. In other words, they expect a gradual increase in demand over the same period by a comparable amount. At the same time, the International Energy Agency believes that coronavirus vaccines will not be an immediate salvation for the market in the foreseeable future, and the task of fully rebalancing the oil market may take longer , so that the "combination of still weak demand and growing supply creates a very difficult background for OPEC+ negotiations."

Meanwhile, in October, OPEC+ countries reduced oil production by 40,000 bpd vs August to 34.11 million bpd, and therefore, the agreement to reduce production was fulfilled by 103%. The reduction was mostly due to ten of OPEC countries participating in the agreement, which produced 21.51 million bpd in October, and so they completed the deal at 106% of the plan. In particular, the United Arab Emirates (UAE) reduced production by 240,000 bpd to 2.42 million bpd, completing the deal by 129%. The OPEC+ agreement involves 10 of the 13 OPEC members, as Iran, Libya and Venezuela are exempt from restrictions. "Non-OPEC" countries complied with the deal by 97%. The calculations show that countries that have ineffectively reduced production in previous months have to cut more than 100,000 bpd in compensation, and most of all, the UAE (28,000 bpd), Iraq (18,000 bpd) and Russia (19,000 bpd).

In general, the agreement is still well observed, but the fresh November OPEC report on Wednesday worsened its forecast for a drop in oil demand in 2020 by 0.3 million barrels per day, to the total annual decrease of 9.8 million bpd. Thus, demand is expected to reach 90 million bpd. The decline is due to weaker-than-expected oil demand in the Organisation for Economic Co-operation and Development (OECD) countries in the third quarter, taking into account the new limited restrictions due to the coronavirus, which may  cause a temporary decline in transport traffic. OPEC does not expect oil consumption to return to pre-crisis levels next year. The forecast for 2021 was also lowered by 0.3 million bpd to 96.26 million bpd. Thus, according to the cartel's calculations, next year the oil market could recover only two-thirds of the total pandemic failure: compared to the current year, demand may increase by 6.2 million bpd.

OPEC worsens its forecasts of global demand for "black gold" for the second time since the beginning of autumn. In its September report, the estimate was reduced by 0.4 million bpd for the current and next year. OPEC stated in the report that commercial crude oil inventories in the world have increased by more than one billion barrels since January, while the process of accumulating excessive fuel continued, despite the deal to reduce production. The increase in inventories is taking place against a lower demand and a disparate decline in oil production, the report notes. So, for the three quarters of 2020, oil demand fell by 10.7 million bpd year-on-year, while oil supply decreased by 5.4 million bpd only. Meanwhile, in September, the OECD countries inventories decreased by 15.3 million barrels, to 3.179 billion barrels. At this level, they remained 212 million barrels above the five-year average. It is obvious that the market situation requires vigilance and constant careful monitoring to prevent the growth of uncertainty in the future. But the oil market is alive, and even trying to grow.

Below is a picture describing the way OPEC estimates the further dynamics of oil demand by the world’s regions, and year by year until 2045. In the developed OECD countries, according to these estimates, demand is expected to decline gradually, rather than increase. The reason is not only a short-term pandemic horizon, but also some longer-term factors that could come into play, including green technology distribution and renewable energy sources. OPEC focuses on comparable growth in demand in China, India and other regions of Eurasia.

It turns out that by 2030, the total world demand is expected to recover only up to the intermediary level of 97.7 million bpd, which still would be 2 million bpd lower than it was at its peak before the pandemic. OPEC expects a repeat of that peak near 99.3 million bpd only by 2035. Based on these estimates, a very gradual, but not too rapid recovery in oil prices may be expected by the markets too. This could follow a long and winding road, which could attempt to reach some higher points to consolidate by the middle of next year at equilibrium levels, probably somewhere between $50 and $55 per barrel. But this could happen if there are no extraordinary severe surprises in a style of 2020.

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