Oil Price Fundamentals - Are Bears Living in La La Land?

In our last fundamentals-report, we wrote that continuing global stock draws seemed all but certain to drive an uptrend in oil prices; the question was how steep it would be. When Brent hit $70/bbl recently, even the boldest projections were exceeded. OECD inventories now look on track to fall well below the 2015-19 average by June. This is primarily because Saudi Arabia, which has cut output by much more than initially planned, has reacted to market fundamentals and been careful not to spoil the upbeat 2H21 outlook by returning barrels to the market too early. In this report, we explore the limits of the oil price rally, the strategy of OPEC+ going forward and other key issues. We also look ahead to 2022, which should be a more interesting year.> Saudi Arabia resolute in propping up prices. The early-March OPEC+ meeting confirmed that the group is playing strong defense and that the Saudis are in no rush to bring barrels back to the market until a sustained demand recovery and stock drawdown are confirmed by data. Riyadh would like to keep prices higher than last year, and when prices have shown signs of weakening, it has been proactive to stymie the decline. The question is at what point it will step in to protect consumers given OPEC's stated objective of ensuring oil market stability.> Latest data strengthens expectations of strong demand recovery in 2H21. Global oil demand is expected to surge in 2H21, with the focus being China (with its record oil imports last year), India (where high retail prices are putting pressure on the government), the US (a seasonal pickup in mobility this summer is expected amid the vast fiscal support) and Europe (still plagued by the pandemic amid low vaccination rates). The pace of air travel's revival will also be closely followed. > It's hard to be a bear in 2021. There are few factors that could derail this year's rally, in our view, but the potential ease of sanctions on Iran's oil and thus return of 2 mln bpd sometime in 4Q21 is one of them. On the other hand, a strong rebound in US shale is unlikely in 2021, with output only likely to rise around 0.5 mln bpd in 2H21. Dollar strengthening and a stock market correction round out our other concerns.> Global inventory drawdown, market rebalancing. We estimate that a further 50 mln bbl drawdown in total OECD stockpiles is needed to bring them to the 2015-19 average of about 2,935 mln bbl. This means they are on track to end 2Q21 well below this target level, a level that has historically meant Brent at around $70/bbl.> Supercycle debate. While there has been talk that we are entering a "supercycle," the OPEC+ deal is set to expire after 1Q22, the group has plenty of spare capacity and US shale will continue to recover.