Oil Market Update – November 2020

The oil market must currently balance a weak near-term outlook with the potential for meaningfully tighter balances towards the end of 2021. In the near term: The dislocation across oil products (mobility exposed vs trade / freight exposed) and regions (re-opening Asia vs secondary waves in both the U nited States and Western Europe) will result in the recovery in demand stalling in 4Q-20. We have subsequently revised down our quarterly demand forecast by 1.4mn b/d; Surplus middle distillate inventories will continue to constrain refinery runs; OPEC will be forced to keep crude off the market as the group’s planned 2.1mn b/d ramp up cannot be absorbed by the refinery sector. Our basecase assumes a three-month extension will be announced following the group’s 30 th November - 1 st December meetings. Longer term: Much depends on the speed of vaccine distribution. Key to the persistent weakness in oil demand are constraints on mobility. A vaccine will eventually lift these constraints. Our basecase expects easing restrictions on international travel by end 3Q-21, with an associated sharp increase in oil consumption in the fourth quarter. The market must subsequently price to limit supply for much of the year (keeping short-cycle tight oil in maintenance mode and ensuring continued OPEC compliance), but we expect additional short-cycle barrels will be required in 4Q-21 and into 2022. Turning to 2022, we remain sceptical of the ability of producers to meet incremental demand and are subsequently bullish the longer dated curve. We maintain our forecasts from our last update in August. Brent is seen averaging $48.8/bbl in 2021 and WTI at $45.8/bb l, with upside capped by high inventories and elevated OPEC+ spare capacity for most of the year . Turning to 2022, Brent is forecast at $59.8/bbl and WTI at $57.8/bbl on tighter supply.